[Trebbor]

Hello, I'm new to the forum and could use some advice. My parents who are in their early 90s, will be receiving funds from the sale of their house in the next month. It's about $200,000. They need to use the funds to help pay for their retirement expenses and they will need to withdraw about $4,000 per month. One of my concerns is that they may outlive their equity at the rate of withdrawal. The other concern is to invest in something safe and liquid. Does anyone know of an annuity product that might be appropriate in their case? Any other suggestions for managing the equity would also be appreciated. They live in Ontario.
Bob

 

[scomac]

There is no annuity that will pay your parents $4000/month. About the best they could hope for with a life annuity and a ten year guarantee is about $2000/month.

Depending on what other sources of income they have, an annuity could meet your needs, but you haven't provided enough information to figure this out.

 

[Trebbor]

I realize that an annuity couldn't pay them the $4,000 per month. What I was trying to ask (badly) was the best way to maximize the return on the $200K. They bring in about $4,000 per month in pension income. Obviously there are no guarantees about how long they will live. If I just invest the $200K conservatively and draw down $4,000 per month from the principal, ie. total income per month $8,000 including pension, the principal plus interest would likely last about a bit over 4 years. Given their current state of health, I doubt they will live that long but you never know. The pension income will last as long as they live unless one of them dies earlier and there's a reduction to 60%. I guess what I'm asking is whether or not there is an investment/insurance product out there that would provide a better guarantee than I could just managing their money. I hope that's a bit more clear.

 

[scomac]

Why draw down on the capital when they already have enough pension income to meet their living expenses? You would be further ahead to build a bond ladder and collect the interest. Every year you would have a wrung mature that could either be reinvested in another bond to add to the ladder or used for expenses.

 

[AdamW]

Investment Products

I guess what I'm asking is whether or not there is an investment/insurance product out there that would provide a better guarantee than I could just managing their money. I hope that's a bit more clear.

My experience has shown that looking for a complicated investment product to meet your needs will do just that, complicate things. Given your parents age, need for income and liquidity scomac is right, just buy a laddered bond or GIC portfolio, the rates wouldn't be all that high these days but there would be regular income and you could, if needed, draw down on the principle.

Given your parents are in their 90s, anything that you'd need to lock yourself into (ie. Annuity or Mutual funds) just doesn't make sense as you'll be the one left holding the bag on fees when they pass away.

 

[leslie]

* Given their age, inflation will never get to be a problem.
* Medical expenses for the final years can be a heavy burden. Planning to die-broke will leave you with nothing to pay for these.
* Since they already have $4000 coming in, they are in no risk of the poorhouse. The extra $4,000 is just gravy. Don't get risky just to satify 'nice-to-have's.
* The payouts from 'immediate annuities' are never publicly quoted for purchasers of your parent's age, so you will have to phone some insurance brokers to ask.

 

[larry macdonald]

Trebbor
Life annuities provide income for life but when the annuitant dies, the capital goes to the insurance company -- not to their estate. If you are named in the will and they live only another year or two, you could be giving away much of that $200,000. Some variable annuities may let the balance go to the estate (as I understand), but then you have to judge if the extra fees are worth it.

 

[Trebbor]

Thank you all for your advice. It's much appreciated. Where I'm having a complication that you may not be aware of is that the cost of the retirement home in which my parents are currently living, is over $7,000 per month. Having $4,000 in pension income just doesn't cut it. That's the reason for requiring the additional income from the investment. We are exploring options for lowering their living expenses, but there's not a lot available at a lower cost in which you would want your parents to live. We may not have a choice, however. Any other suggestions in the meantime are welcome.

 

[humble_pie]

scomac is nearly always right, but this time he seems to be wearing a harder hat than usual.

i think what the original poster is saying is that the parents' expenses will be 8000/month or nearly 100K a year. Perhaps there are very high medical expenses. Meanwhile the pension income is half that, so the poster is wondering if it's possible to stretch 200K proceeds from the house sale out over 5, 6 and more years, because drawing down the principal will exhaust the liquid funds in just over 4 years ...

perhaps it's possible to trim all sails, including the planned expense budget (is there an establishment that would meet the family's standards that would be farther out in the country, away from a large & expensive metro agglomeration ?) And construct a simple bond ladder. And invade capital to a certain extent.

what i would worry about is possible bankruptcy of any insurance company that would quote an extravagant annuity in such circmstances. Another poster has pointed out that a basic annuity could end with all funds in hands of insurance co in relatively short period of time.

trebbor your parents are fortunate to have such a loyal and caring son. May i offer you my humble but heartfelt best wishes for this holiday season and for the new year.

 

[OhGreatGuru]

This is going to sound cruel. But the problem is your parents, probably for the first time in their lives, are effectively living beyond their means, unless they are sure of either dying or moving to long-term care (which is much cheaper because of governement subsidy) before their capital runs out (about 5 years.) Anything you do is going to be a gamble based on their life expectancy unless they move to more affordable accommodation.

 

[Trebbor]

I don't feel offended by the comments as they are right on. Unfortunately the decision to move where they did, was not my nor my parent's decision. It was a short term move to help them out of a difficult situation which of course now needs to be resolved. My parents are quite aware of the limitations of their capital and it's keeping them awake at night. Not a great situation for them at this time of life. What I'm hearing from all the wonderful folks on this forum is that annuities are not the way to go, a bond ladder or GIC portfolio is probably safest, a reduction in living expenses is absolute, and that managing the capital myself is the least risk (I have been managing my own RRSPs for years and have yet to lose money even in the last downturn). The key to everything is the health issue. If my parents' health stays positive, then the long term outlook for their capital is not the best without implementing changes immediately. If however, their health starts to fail, assuming that most major medical expenses will be covered through their health plans, then the money may last, but it's a big gamble. It's certainly made me look at my own pending retirement very differently. Thank you all for your input and if you have any more ideas, please send them on.

 

[humble_pie]

"my parents are quite aware of the limitations of their capital and it's keeping them awake at night ..."

i'm from the school that says every problem has got a hidden benefit if one knows how to look. Turn the above sentence inside out and marvel at this amazing couple in their 90s who are still so perfectly aware of reality and their present worrisome circumstances that now they're having trouble sleeping. I think this could be wonderful.

moving the frail elderly is stressful and it's normal to first think of keeping them where they are, even though it's beyond the budget. But there has to be, within a 150-kilometre radius of where you live, an affordable and pleasant residence. All the best.

 

[OhGreatGuru]

There seems to be a growing market for "luxury" retirement residences that can run $8K/mo. for a couple. But, although my numbers may be a couple of years out of date, a more "average" cost for a 2-bdrm apt. in a seniors residence, with meal service, housekeeping, and some nursing assistance should run $4-5K in a medium-sized Ontario city.