Portfolio for my 92 year old grandma

[AzCactus]

Hey guys-looking for some advice. My grandma is 92 and due to having some issues with her kids I'm managing her assets. Her physical health is good, however she also has stage 6 dementia (there's a total of 7 stages). The average life expectancy for someone with this is 4 years or fewer. This is not age adjusted A big more below:

Her expenses are about $4,500. She has $1300 in social security-bringing her net expenses to about $3,200/month

 

 

Her asset base is about 600K and it's currently all in a hysa earning about 4.8%. This creates about $2,400/month on a pretax basis so we can estimate $2,000 after taxes. Effectively we are going into the principal at about $1200/month or $14,400 per year. My thought is to invest her funds as shown below:

25%-VOO-dividends reinvested

25%-SCHD-dividends reinvested

10%-FZILX-dividends reinvested

40%-money market/CD's.

 

 

My thought was to dollar cost average over the next 24 months. No rhyme or reason here just seems that the market is a little overheated.

Any guidance is appreciated.  Thanks in advance and happy to answer any questions.  

Edited April 18 by AzCactus

[rkbabang]

I don’t know maybe leave it as it is?  At $14400/year she can last another 41 years before running out of money. Maybe she should be spending more and enjoying herself at this point. She can’t take it with her. I’m not familiar with how bad stage 6 is, but I assume she can still enjoy things on a daily basis and do things which makes her happy.

[schin]

8 minutes ago, rkbabang said:

I don’t know maybe leave it as it is?  At $14400/year she can last another 41 years before running out of money. Maybe she should be spending more and enjoying herself at this point. She can’t take it with her. I’m not familiar with how bad stage 6 is, but I assume she can still enjoy things on a daily basis and do things which makes her happy.

 

+1

[AzCactus]

 

24 minutes ago, rkbabang said:

I don’t know maybe leave it as it is?  At $14400/year she can last another 41 years before running out of money. Maybe she should be spending more and enjoying herself at this point. She can’t take it with her. I’m not familiar with how bad stage 6 is, but I assume she can still enjoy things on a daily basis and do things which makes her happy.

 

Stage 6 is pretty bad.  There are only 7 stages and she can seldom enjoy her life.  She defecates wherever she is even if it's not at a toilet and can't really have a cohesive conversation.  

 

My other concern is that if (when) interest rates fall the vast majority of her income (currently interest income) is going to fall and that's going to increase the drawdown rate potentially substantially.    

[Ross812]

Buy a 5yr cd and/or treasury ladder. If you want to buy some equities to b hedge interest rates I'd go no more than 25% and split equality between xlu, xlv, and xlp.

[bizaro86]

I'd leave it in cash equivalents

[vinod1]

You did an outstanding job of asset allocation. Just great!

 

Buy an annuity with a small portion of the portfolio. It would be perfect for someone like your grandma.

 

If you buy a $150,000 annuity, she would get about $2700 per month payout for rest of her life. This should pretty much cover her remaining expenses after SS. Keep in mind this is not inflation adjusted, but she has 75% of the portfolio for growth and income. Use the cash portion to buy this.

 

You should be getting $9000 in dividends from VOO, SCHD and FZILX which would be growing. 

 

So total you have $3450 in cash coming in per month and you have not touched about $90,000 that is still in money market.

 

 

Edited April 18 by vinod1

[winjitsu]

11 hours ago, bizaro86 said:

I'd leave it in cash equivalents

+1. End of life care (stage 7 fully assisted, plus possible funeral expenses) means you're going to want to keep a large chunk of cash or near liquid assets. I think most people underestimate these incredibly expensive final months unless the family has committed to something like assisted death or early hospice care. 

 

4 years isn't enough to go through a market cycle, so I'm not sure you'd want to have that much equity exposure unless you are certain you don't need that money. 

 

22 minutes ago, vinod1 said:

If you buy a $150,000 annuity, she would get about $2700 per month payout for rest of her life. This should pretty much cover her remaining expenses after SS. Keep in mind this is not inflation adjusted, but she has 75% of the portfolio for growth and income. Use the cash portion to buy this.

Annuity might not be a bad idea since you take out market risk and longevity risk off the table. 

[rkbabang]

13 hours ago, AzCactus said:

 

 

Stage 6 is pretty bad.  There are only 7 stages and she can seldom enjoy her life.  She defecates wherever she is even if it's not at a toilet and can't really have a cohesive conversation.  

 

My other concern is that if (when) interest rates fall the vast majority of her income (currently interest income) is going to fall and that's going to increase the drawdown rate potentially substantially.    

 

Oh wow, I'm sorry, I didn't realize it was that bad.  I'd still stay away from stocks at her age. I like the ideas above about CD ladders and maybe an annuity.   My goal would be to make sure she has everything she needs or might need for the rest of her life and preserve the rest in safe assets/cash.  Let whoever inherits what's left later decide what to do with it based on their age/goals.

 

[Saluki]

Sorry about your grandma.  If her life expectancy is 4 years, then preserving the capital/income should probably take priority over the highest possible return. Even index funds hit potholes and 90% of the time will return to positive within 5 years, but you don't want to be selling at a downturn, which is when she may need it, regardless of what the market it doing.  

 

A CD ladder will probably give you the best return (higher interest because you are locking it in for a while, and ability to access it because by laddering it they become due and roll over periodically).  This is FDIC guaranteed and will protect the income stream if interest rates go down.  If you are worried about locking in money if interest rates go up, you can put some of the money in the opposite bet.  You can Treasury bonds directly from the government that are indexed to inflation (must hold for 2 years) for a portion of that and you will have a small hedge in the other direction. 

[Eldad]

Thank you for being a good grandson. 

[CGJB]

3 minutes ago, Eldad said:

Thank you for being a good grandson. 

 

+1

[AzCactus]

Thanks all for the advice.  She partially raised me so this hits home hard.  

 

@Saluki-I appreciate your guidance and this seems to be a pretty safe strategy.  

 

@vinod1-Will need to research annuities a bit more but if the return is around what you indicated that seems like it would reduce stress significantly.

Edited April 18 by AzCactus

[KCLarkin]

Is there a Vanguard of annuities? It does seem like the ideal product for this life stage but the commissions and fees mean most annuities are a rip-off. Caveat emptor.

 

If you can’t find a good annuity, a fixed income ladder is probably the best option for that life stage. But honestly, her current portfolio seems fine unless you are convinced rates are coming down quickly.

[Parsad]

6 hours ago, rkbabang said:

 

Oh wow, I'm sorry, I didn't realize it was that bad.  I'd still stay away from stocks at her age. I like the ideas above about CD ladders and maybe an annuity.   My goal would be to make sure she has everything she needs or might need for the rest of her life and preserve the rest in safe assets/cash.  Let whoever inherits what's left later decide what to do with it based on their age/goals.

 

 

+1!  Yup, absolutely.  Market risk is not something she needs at 92.  A portion in an annuity locking in that income, the rest in redeemable GIC's laddered is probably the best solution.  Cheers!

[Parsad]

6 hours ago, Eldad said:

Thank you for being a good grandson. 

 

+1!  Kudos.  Cheers!

[Jaygo]

I’ll start with my best wishes for the both of you, your situation is not easy and will get very tough to be sure. For that reason I would go with cash equivalents also. 
 

for once in long time she can get a decent return around 4.7 pre tax with very little risk. I think you should consider the psychological problems if the market slowly looses air here and is down 20 percent by the time she passes away. 

you may be looked to as the person who lost grandmas money ( we know you were just looking out for her btw) I just don’t see the value in taking any risk at that age. 600k is a lot but also a little and I think 4 and change is damn good to sit by her side and say “grandma everything is going to be ok.”  
 

I saw my dad needlessly lose sleep up to the day he died over some completely terrible investments for a terminal man of 70 through royal bank of Canada dogshit advisors. I don’t want that for her or you, i believe when you get old you want safe and secure and don’t care about making money you will never see.  
 

My two cents and hope I don’t overstep. 

[Yosemite]

AZ,

 

My recommendation is to place 2 years of expenses $100k to $200k in a mixture of high yield money market and 2 year or so CDs (ladder),  the rest in short term and intermediate term investment grade index bond funds (or treasuries).

 

You have not mentioned specific medical and care costs but I would assume they could cancel out any taxes owed if done correctly.

 

A fixed annuity seems to late at her age and condition -  just dip into the principal.  An annuity at her age is just going to take the principal anyways.

 

A (possibly) concern based on the family dynamics you hinted at is to make sure all legal stuff is airtight.    Asset POA, Health Care POA, Will etc. 

 

With her condition this will require an elder care lawyer.

 

[vinod1]

7 hours ago, AzCactus said:

Thanks all for the advice.  She partially raised me so this hits home hard.  

 

@Saluki-I appreciate your guidance and this seems to be a pretty safe strategy.  

 

@vinod1-Will need to research annuities a bit more but if the return is around what you indicated that seems like it would reduce stress significantly.

 

Let me change my suggestion a little. I was focusing entirely on monthly needs without considering any lump sum needs for unexpected contingencies.

 

1. If she needs long term care, do you have a plan to fund that? That is a significant risk. Might want to keep aside $150k to $200k for that kind of situation, if you are not able to get a cost effective long term care insurance. Plus you need something like $50-$100k for emergencies. You might want to use laddered individual TIPS (1 year, 2 year and 3 year should be enough) for this to protect from unexpected inflation. A sudden one time inflation of any significant amount would be a killer to nominal bonds.

 

2. No matter what, an annuity is a no brainer in this case. Only question is how much and who to get it from.

 

 

[bizaro86]

5 hours ago, vinod1 said:

 

2. No matter what, an annuity is a no brainer in this case. Only question is how much and who to get it from.

 

I think it's quite possible that the economics of an annuity in this situation end up very closely approximating the following:

 

She gets the principal back, while the seller of the annuity gets 100% of the returns.

 

The OP should definitely price it out, but I'd be surprised if it's a no-brainer given the low life expectancy here.

[KCLarkin]

9 hours ago, bizaro86 said:

 

I think it's quite possible that the economics of an annuity in this situation end up very closely approximating the following:

 

She gets the principal back, while the seller of the annuity gets 100% of the returns.

 

The OP should definitely price it out, but I'd be surprised if it's a no-brainer given the low life expectancy here.

Agree that it is unlikely a no-brainer and very likely a bad deal. But...

 

This is an insurance product not an investment, so you should be expecting to only get principal back..at best. You are insuring against the "risk" of her living longer than four years (or whatever the insurer's actuarial tables say).

 

Given her age and current principal drawdown, I'm not sure the insurance is necessary. She can probably afford to self-insure. I'd be worried about her burn rate rising if she needs more intensive LTC. 

[John Hjorth]

@AzCactus,

 

Have you considered the legal aspects of you are comtemplating to do - with regard to your personal liability?

 

The situation with regard to making changes can't be trivial, also taking into consideration an asset base of USD 600 K, which can't be considered a trivial amount of money. I mean, the combination of issues with personal stage 6 dementia at the person, combined with personal issues between the person and that persons off-spring isen't exactly a catalyst nor an incentive for doing anything, or changing anything, because of the possibility being held personally liable if something you decide and initiate turns out to a bad outcome.

 

What is your existing mandate with your grandma, and what is the agreement basis with the direct decendants - if any, by now?

 

- - - o 0 o - - -

 

I have personally been in a similar situation with my dad [now passed away, so late dad] back in the end of 2013 / early 2014. It ended up working out quite well, but certainly not as originally planned and foreseen, with some very unpleasant experiences for me as the outcome of that as result, and this was not even related to the return of the investments - no, my original assumptions about who would inherit my father did hold up in the end, because my father outlived two of his four sons [I haven't tried to calculate the a prori probability of that ocurring, but it's very, very low].

 

I had a clear written investment mandate  from my father [power of attorney with the involving banks], and an oral agrement with my father and eldest brother always to inform and consult my eldest brother in material matters, materiality judged by discretion and some leeway.

[AzCactus]

@John Hjorth-Thanks for the insights.  I have thought about keeping things exactly as they are and letting the account slowly drawdown.  I have also thought about the potential liability.  As her trustee, the trust documents afford me the ability to make investments for her best interest.  However, there isn't a formal investment mandate. 

 

There are two other beneficiaries who I am relatively close to but it is fair that if the account were to fall substantially they may attempt legal action against me.  

 

My main concerns (and the reason for thinking about investing more aggressively) include:

• Her income-About 35% of her income is social security, the rest is interest income from a hysa.  My expectation is that this will decrease eventually.  If interest rates were to fall to 2020 or 2021 levels this would significantly increase her drawdown.  Might look into CD's to offset some risk here
• Her expenses-Between potentially needing a caretaker around more or the option of her being in a nursing home-her expenses could increase substantially.  By my estimates in a worse case scenario they could approximately double.  
• Her life expectancy-While I mentioned above and think it's likely that 4 years is around the right number if she lived much longer this would further drain her expenses.  

 

Ultimately my fears are that in 2ish years interest rates and therefore her income is much lower, her condition has decreased and her expenses are much higher and the drawdown goes up substantially and this becomes a real challenge.  Even at the present time we are talking about increasing her care which would likely increase about 1K/month to drawdown. 

[Ulti]

 My 2 cents: I had a similar situation several years ago with my 95 year old mother in law. Her family approached me to help them manage (ie clean up the mess of her portfolio ). Assets were all outside of retirement accounts )

With the families permission moved her to C.Sch. Established a relationship with the manager of the outlet (family approved ).  I cleaned up\sold and emphasized companies she owned that were in good shape and produced dividends(except her berkshire of course ) .Also chose not to reinvest but to take the cash

for expenses. Wound up with about a 40\60 portfolio.

Suggestions:

-Don't reinvest dividends but use vehicles that generate income (vwinx ?)

-Here is Vanguards info on Annuities:https://ownyourfuture.vanguard.com/content/en/learn/living-in-retirement/are-annuities-right-for-me.html

-Chose not to do an annuity because she  has a bit more in assets than your Grandma and like liquidity.

- It might be worthwhile to explore Medicaid options for that just in case the running out of money option occurs  https://www.medicaid.gov/medicaid/eligibility/index.html ... you live in AZ from your handle?

-https://lawforseniors.org/

         has some pretty info that might help...got this from the Arizona legal aid group.

 

Good luck , who knows the future, but your an awesome grandson for doing this.

 

 

 

[John Hjorth]

@AzCactus,

 

Great to read that my comments above were of quite limited relevance and utility to you, simply because you already were aware of these dimensions of the whole situation related to yourself.