Author Topic: How to invest my dad's 100.000 retirement money?  (Read 3950 times)

Cass

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How to invest my dad's 100.000 retirement money?
« on: October 08, 2012, 01:17:27 PM »
I really hope the wise Mustachians can figure out something I'm missing, because I'm kind of stumped.

My dad is 70 years old. He gets a small government pension, and has 100.000 of his own saved in addition. In addition to the government pension, he needs 500 per month to live. This amount can't possibly be lowered. My dad's already embracing the ultimate Mustachian lifestyle - no pets, bikes everywhere, tiny grocery bills, doesn't eat out, doesn't go on vacation, his only hobby's a sport that costs him 25 per year, no cable, prepaid phone, etc. So somehow, I need to make those 100.000 yield 500 per month.

(If you're wondering why I'm butting in all over my dad's financial situation, it's because he has early-stage Alzheimer's and can't manage his money on his own anymore. He's already lost a couple thousand to an unscrupulous financial advisor who was happy to take advantage of an old man.)

Problem: The investment needs to be rock-solid safe. This is every penny my dad has saved, and he needs it now. If anything were to happen to it, he'd be really screwed. The best rates I could find that offer that kind of safety were 4 % per year.

You should also probably know that we're German, so some advice that would work for Americans might not work quite the same way for us.

Here's two ideas I've come up with:

- Invest the 100,000 at 4 % per year. Monthly income: 333.
I'd give him an additional 167 per month to make up the difference to the 500, and get the 100,000 when he dies.
If he dies at 90, that's an 8,38 % interest rate for me. If he dies at 100, ~3 %.

- Buy an apartment with the 100,000. In our area (Bavaria, Germany), 100,000 will buy an apartment you can rent out for 500/month, possibly 600 if you're really lucky. (Yeah, when I first heard of the 2 % rule, or even the 1 % rule, I could do nothing but giggle-snort incredulously. Correct me if you know how to get better rates around here, obviously.)

Again, I'd cover whatever the difference would be to 500 after tax/vacancy/etc, and get the apartment when he dies.

On its face, 600 per month would obviously be a better return on investment than 333, but if the 50 % rule comes true and 300 of that go to property tax/repairs/vacancy/etc, it's worse. Also, more work. Also, we just finally finished a nightmarish battle with my mom's crazy last tenant that ended up costing us about a year's worth of rent, and I'm kind of wary of landlording now.

If anyone has any better ideas, I'd be very grateful. I'm really not looking to make money off my dad here, I just want him to be able to live comfortably and safely. But he'd really like it if there was something left he could pass on to me at the end of his life.

okits

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Re: How to invest my dad's 100.000 retirement money?
« Reply #1 on: October 08, 2012, 02:12:35 PM »
For ultimate safety I would recommend investing your dad's money in a GIC or government bonds.  Yes, the yields are low, but you've mentioned that he can't afford to lose any of the principal, and these are the safest investments he is going to get.

Interest rates are low now, but they won't stay that way forever.  It's hard to say if his investments will yield 2% or 12% in five years, but bear in mind there is the (good) possibility his returns will increase in the future (potentially enough to provide the 500 per month and compensate for inflation.)

You're aware of the risks and potential expenses of landlording, so while it's an option I think you've answered your own question.  The work and risk involved are not suitable for the retirement fund your dad is currently living off.

I'm glad to hear you're able to supplement him a bit (hopefully it is not a hardship for you).  Your support, and using up some of his principal (not ultra-safe, but realistically, this is necessary for some retirees) will hopefully keep him going for as long as he needs.  He might like to leave you an inheritance, but you may never need that money, whereas he may have need for it in his later years, so that's ultimately the best use for it.

Ben

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Re: How to invest my dad's 100.000 retirement money?
« Reply #2 on: October 09, 2012, 09:30:35 AM »
Is there a reason you prefer to supplement his income now, as opposed to drawing down his principal as needed (and being prepared to step in as needed if he outlives his nest egg)?

I may be showing my ignorance of how health care in Germany works, but it seems reasonable that his medical costs may go up substantially in the next few years. In the US, the government is more likely to assist with those caretaking costs once the individual's assets have depleted.

I would echo Okits' caution regarding a rental purchase, unless  you have the desire to add a part-time job to your schedule.

If you are willing to act as his safety net now (by supplementing his income to avoid withdrawal of principal) or later (to supplement his income in case of depleted savings), is there an advantage to doing it now?

Ben

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Re: How to invest my dad's 100.000 retirement money?
« Reply #3 on: October 09, 2012, 09:44:24 AM »
A few more thoughts:

First, I want to apologize for the next two paragraphs because they may come across as heartlessly calculating, but my intent is to help the two of you think through and identify the best possible decision.

1. From an 'outcome' point of view, the first scenario you sketched out is similar to you providing an annuity for your father, by making up the difference between his income and what he needs, with any remainder likely left to you as an inheritance. There is slight risk (for him) that something will change you and you will be unable to make up the difference, and slight risk (for you) that he will either leave the money to another beneficiary or the inheritance will otherwise be used/claimed for medical or other expenses between now and when he passes away.

2. Also, he has considerable more safety than another person in his position since you are able and willing to support him for his shortfall, which may give you more flexibility on the risk/return investment continuum.

3. Have you shopped for an annuity? With his age and medical condition (which I am very sorry to hear about), it could potentially pay out the 6% revenue you are seeking. Of course, you would not receive the money spent on the annuity, but it could be a way to secure more certainty about the financial future for him without relying on your ability to supplement his income.

Ben

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Re: How to invest my dad's 100.000 retirement money?
« Reply #4 on: October 09, 2012, 10:18:09 AM »
If you found a solid and safe way to get 4% return (be in a high interest bank account, gov't bond, whatever) I would say go with that. Real estate returns are much less predictable and can be a lot more work, which you have seen first hand with your mom's tenant.

Rather than supplementing his investment returns with your income with the plan to inherit the entire principal, I would instead withdraw part of the principal annually and use that to cover his expenses. The reason for doing this is that you may have to pay a significant inheritance tax on a lump sum of 100k, after having paid out your after tax dollars. If the money runs out before you are done, then you can supplement his income from your savings (you would have saved 167/mo by not supplementing his expenses at the start, which you can invest). However, to be perfectly honest, life expectancy with Alzheimer's disease is less than 14 years, so the likelihood of his funds getting depleted are low. I apologize in advance if that sounds harsh, but that's reality.

unpolloloco

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Re: How to invest my dad's 100.000 retirement money?
« Reply #5 on: October 09, 2012, 11:24:47 AM »
At a 4% yield and 6% withdrawal rate, that 100k will last 30 years (to a ripe old age of 100).  Since few make it that far, it's unlikely additional funds will be needed (and if they are, hopefully you'll be in a better place to help out for a few years).  Withdrawing principle isn't always a bad thing!

Cass

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Re: How to invest my dad's 100.000 retirement money?
« Reply #6 on: October 09, 2012, 11:33:19 AM »
Ben: Shopping around for annuities was what gave me this idea in the first place. They were willing to offer him 500/month for the rest of his life, but the 100,000 would be gone. My father went "I can live on that, I'll take it," and I did the math and realized that unless my dad lives past the age of 90, which is sadly highly unlikely, the banks would be making a tidy profit there. So I figured, how about I pay the annuity, and take on the tiny "risk" of him living that long, and the large chance of there being money left by the time he dies. No need for a bank to grab the money.

Of course there's a small chance that something might happen to make me unable to continue to pay, but I'm going to be a doctor soon. I won't be making the kind of money American doctors do, but I'll still have a good income in a field with extremely high employment rates, and I'm frugal and almost debt-free (interest-free student loans, not consumer debt), so I'm not too worried.

Using up the principal, and then me helping him if it runs out: I'm going to have to do the math on that again. It seemed a worse deal financially, because I can only get the high interest rates if the money's invested for at least 10 years, and that won't be possible if he needs to use part of it up. No 4 % in that case. Does anyone know of an interest calculator that can tell me how fast the money would deplete? The interest calculator I use doesn't have an option for "what happens if i take out x per month in addition to the interest?"

Medical costs aren't a problem - with German insurance, the absolute most we'd be looking at is a few hundred even if he ends up hospitalized for months - but if he ends up needing non-medical care, which is sadly likely with Alzheimer's, things are going to get insanely expensive really fast. I'm currently dealing with that possibility by sticking my head in the sand. /o\

If we do choose the option where I pay him the annuity, he'd probably transfer the 100.000 to me over a couple of years, to avoid a taxable lump-sum in the event of his death. There's a limit to how much you can annually transfer debt-free to your children, but it's pretty high. (And of course we'd draw up a contract to make sure I can't just take his money and leave him hanging.)

Ben

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Re: How to invest my dad's 100.000 retirement money?
« Reply #7 on: October 12, 2012, 06:01:33 AM »
Cass,

It sounds like you're thinking through the options pretty clearly. You could also put a portion (e.g. 50-70k) in the safe-but-inflexible 4% investment, and the remaining portion in an investment which has higher risk or lower returns but more flexibility, and draw down that principal as needed. In ten years (when the other investment has matured) you can re-evaluate your allocation. No requirement to put all your eggs in one basket.

Did you mean "annually transfer debt-free" or 'annually transfer tax-free' in the final paragraph?