Q. My parents have had to sell their home and move to an assisted living facility. We will need to use the money from that sale to help pay their monthly rent. They were able to net about $425,000 from the sale and they will need to withdraw about $3,000 a month to help pay for assisted living. Where would you suggest putting the $425,000 so that it is safe and can also continue to grow and last as long as possible? ---K.B., Austin, TX
A. Let’s start with the basics. If their monthly expense remained the same it would last for nearly 12 years without any earnings. The typical length of residence in an assisted-living facility is just under 3 years, with residents either dying or needing to move to nursing care. Nursing care would cost a good deal more, so it would not be wise to make too many long-term commitments, even with safe investments, due to penalties for early withdrawal on most fixed period investments.
Bottom line: your planning horizon is pretty short.
One solution would be to have a constant $70,000 in a checking account that earns something. In addition, you would put $70,000 into each of 5 “baskets” allocated to the coming 5 years. The first year would be in cash, making the starting checking account balance $140,000. Then you would search for the highest yield certificates of deposit you can find with maturities of 1, 2, 3 and 4 years. At the end of each year, allow circumstances to dictate what you do with any cash left over. Doing this will mean that you can always have the cash to pay for nursing care for two people for one year and the average maturity of the certificates of deposit will decline each year. The money won’t earn much interest, but that’s not your primary goal.
Q. I am 84 years old, in good health, and will be done working at the end of September. I started collecting Social Security at 62 and then went back to work a month later. My wife will be 63 in November and is on disability. We have $190,000 in Vanguard index funds. It is divided about one-fourth in traditional IRA’s and three-fourths in Roth accounts. I have $181,000 plus in my 401(k). Additional investments and cash give us $420,000 plus. Our home is paid for and we have no debt. What must I do to insure that the money lasts? I have been contemplating putting all my assets into Vanguard and partnering with an advisor. ---R.H., Cedar Rapids, Iowa
A. There are two big unknowns here. One is whether your wife’s disability is one that reduces her life expectancy. If it doesn’t, your joint life expectancy isn’t much shorter than a couple where both are 65. If it does shorten her expectancy, you’ll be able to withdraw at a higher rate without great risk of running out of money.
The second unknown is how much of your basic living expenses are covered by your combined Social Security benefits. If most or all are covered (yes, some people can do this) your savings are a fund for discretionary spending and emergencies. If Social Security doesn’t cover your basic expenses, then the drawdown rate could become large enough to endanger the long-term survival of your savings.
One way to reduce that risk is to buy additional guaranteed income with a single premium life annuity. This is an insurance contract that would provide a monthly income for life. It could be based on your life alone, or on both lives. On the website immediateannuities.com, for instance, an 84 year old man can get a lifetime income at a rate of 13.82 percent on a $100,000 contract. A contract that pays for 15-years certain would provide an 8.12 percent payout. If your wife’s life expectancy is reduced by her disability, the 15-year certain contract would be an interesting option for a portion of your assets. If you do partner with a financial planner, you’ll need to be certain that the planner has a good understanding of how life expectancy influences asset choices.