What should an older person do with a LOT of cash?

Factual Questions
1

Let’s say a 75 year old man sells his home and moves in with his son. The net proceeds from the home sale are roughly $200k. It is all from equity (original down payment) as the house was sold for the same price it was purchased for five years earlier.

The man has a comfortable monthly income from his pension and SS and typically spends significantly less than he brings in; and he has enough in current savings to cover any emergencies.

So… assuming he’s relatively healthy and won’t require earning interest on the $200k, is there any reason to put in in a standard bank account or CD, rather than sticking it in a safe deposit box? Are there benefits to stashing it away?

2

Can you guarantee that this man won’t need any long-term care, either assisted living or nursing? First step, get that covered somehow - use some of the cash to buy an insurance policy.

But turning to the basic question, the money should be stashed in something that pays interest, if for no other reason than to protect it from inflation. Cash in a safe deposit box is almost guaranteed to lose value (unless we suddenly go into a deflationary period, which seems unlikely with all that stimulus money being pumped into the economy). CDs are OK, but you should look into TIPS.

(Tangential advice - set up a revocable living trust, and transfer the man’s assets into it. This will let you avoid probate fees entirely, and will speed up the process of settling the man’s affairs when he eventually shuffles off this mortal coil. When my mother died, I had things completely taken care of within a month, instead of the many, many months that probate typically requires.)

3

Alternatively, you might be interested in the fine opportunity presented by the Early Out Aggressive Acquisition Fund. Send the cash to PO Box 123. Prospectus to follow. :wink:

4

Good information, Early Out. One of the reasons he’s not interested in a CD or (as I just read it) TIPS is that he would like instant access to his money in case he does need it. He doesn’t want to tie it up and be penalized for withdrawing it early.

5

Well, maybe keep some of it in a savings account, for quick access.

But the penalties for withdrawing money from a CD early are quite small, certainly less than the interest. So, instead of earning $1000 in interest, you might earn only $500 by withdrawing it early. Still better than $0. And there’s no “waiting” to get your cash out - you just go to the bank and cash in the CD. Just don’t put it all into one big CD. Spread it out so that, if you do have to cash in a CD early, you don’t have to cash in the whole thing, and take the interest hit on all of it.

(By the way, be careful about having all $200k in one bank - the FDIC insurance limit is currently $250k, but it’s slated to go back to $100k at the end of 2013. I’ll wager they up the limit permanently, but it’s worth paying attention to it).

TIPS are not quite as liquid, as you have to rely on a secondary market if you want to sell them before maturity, and you could end up slightly on the losing end because of fluctuations in the principle value.

Another alternative is to plunk the money into a brokerage account, and buy a fund that’s restricted to safe, inflation-protected securities. Getting the money out then becomes no more than an overnight matter (order to sell some shares of it on Monday, cash shows up in your account by Tuesday).

6

Hookers and fast cars? At least that’s how I am going to spend my money at that age. But 200K is a small amount and won’t get you a long way. I hope I’ll have stashed several millions by the time I reach 75.

7

Is this cash to be used as a supply of rent money for the new accommodations, or is there other income to cover that? It’s only fair to the son, after all. If the former, then an annuity with constant monthly payments to the son seems like a good choice.

8

I have never understood this fixation by seniors on early withdrawal “penalties”. My MIL has the same one.

Choice 1: put the greenbacks in a safe deposit box. Earn zero interest and have inflation niblle or devour the principal as it may. And if somehow your box is broken into and the cash is stolen, tough. You just lost $200K

Choice 2: Buy a CD which typically pays about inflation +1% if held to maturity, and something a bit less than inflation if redeemed early. There is no way it ever is worth less than what you paid for it. And if somehow the bank is robbed, defrauaded, or goes completely out of business, Uncle Sam will replace every cent within a couple days.

In each case it takes one trip to the bank to put the cash in, and one trip to get it back.

In other words, there is no scenario where choice 1 is better than choice 2. Yet seniors keep trying to invent a reason why #1 is the good idea.

Grrr.

9

I completely agree with LSL. It would be an insanely bad decision to convert those funds to cash and stick them in a safe deposit box. We are comfortable with low levels of inflation currently, but that could change rather quickly and destroy the value of his savings.

We all take risks with our money, just to take three of many more risks you can choose between:

Liquidity risk - The risk that your money will not be immediately available

Purchasing power risk - The risk that inflation will erode the value of your investment.

Market risk - The risk of a decline in value or loss of principal.

If you imagine each of these risks on a 1-10 scale, you can’t choose zero risk for all three. So putting it in a safe deposit box brings market risk and liquidity risk to near zero, but it exposes you to other risks. Maybe the best choice would be either a CD or a high yield savings account like ING Direct or HBC that has no withdrawal penalties and currently yields about 1.5%. They are FDIC insured, but only available as electronic accounts.

10

I agree with everyone above, but just wanted to add that some people are predicting sharply higher interest rates in the future. Therefore, if he is looking at a CD with a fixed rate, he may want to look at relatively short-term CDS (i.e., 6-12 months) as opposed to longer-term CDS so he can take advantage of the higher interest rates (possibly) to come.

11

Unless a 75 year old man has a hell of an insurance policy some portion of that 200K should be dedicated to decent health insurance.

If I were 75 and had a nice will chunk like that I take at least 50K - 100K and taking advantage of the current economy buy some stocks that are cheap right now. But that’s generic advice. If I really had 200K I would use the cash leverage to buy as much residential real estate as possible for use as income property rentals. We’re close to market bottom right now and there are some deals out there that are insane.

12

If he invests in CDs, I recommend laddering them, which is a strategy of investing in a series of Cds with different terms. Also, it is possible to do better than one percent, particular for jumbo CDs. My mother has several hundred thousand in cash retirement savings and makes it almost a hobby to earn the highest possible return on bank and credit union CDs. (She found, for instance, that the bank was willing to negotiate somewhat on the interest rate to prevent her from moving the money elsewhere.)

13

I’m no financial guru by any stretch of the imagination but couldn’t he put in in a money market fund, thereby earning a respectable interest (and hopefully defeating inflation) but also having essentially immediate access to it?

14

He will be living in an apartment, attached to his son’s house. He contributed a chunk of the down payment ($40k) when they bought the house because they specifically bought it with the apartment for him. He will be paying a small amount of rent as well.

The $200k is not earmarked for anything specific. He has enough income to cover his bills and save some money, he has a decent amount in savings and checking currently, and he has good health insurance.

I will advise him against the safe deposit box and work with him on finding a CD plan that he’s comfortable with.

Thanks for all of the replies.

15

FTR, at many (most?) banks, you’ve got no insurance on the Safe Deposit box. Even if you did, I expect the banks would be loathe to insure cash.
The odds of the box getting destroyed are quite small, but one should be aware that the occasional well-organized thief does force entry into multiple bank SD boxes.

16

There’s a few things to consider. I volunteer at a retirement center and a LOT of these people (at least at this center) are VERY old. I’m talking in the 85-95 range. And there is nothing really wrong with these people except they’re old and it’s nice to have someone around. More than a few of these people (I can name you five off the top of my head) are there because they outlived their kids.

These old people moved in with their son or daughter and then the kid drops dead. Once you reach 70 years old, if you’re still in good health, there is a huge chance you’re gonna live a lot longer. This is because by that age, most people with heart issues and cancer issues have long since died or are sick. So if a man is 75 and in good health with no prior issues, there’s a good chance he can live another 20 years.

The second thing is a lot of these older people can move their assets so that by “spending down” they can get government assistance with any long term stays they may require later on. It may not be a good idea to have your assets right out in the open. Putting $1,000 a month in a safe deposit box with net you 60,000 of “off the books” money by the time you hit 80. (You can claim it is rent paid)

As for me when I had a large sum of cash it used to irriate me that they were offering only 1.9% for my $30,000. I mean even Mr Drysdale paid 5%. Back in the 80s I had a checking account with 18% interest. Of course those days are long gone, but still, mentally I felt like taking my money out and saying “why let the banks use it.” Of course I didn’t but for 1.9% it felt satisfying to “screw” the banks by keeping my money to me.

Older people lived through the depressions and when I talk to them about it, it DEEPLY effects them. With the way banks are people don’t think twice about bankruptcy and those who read my posts know I defend personal and coroporate bankruptcy as an necessary. But these older people find great shame in that and it’s really a debt of honor.

They don’t want to lose any money and they hate to go back on any promises. Even to a bank.

Lastly I found just by talking to them, most of them want to LEAVE their kids money. This drives me mad, especially since most of these older people I deal with are simply old. They can move around just fine, they got no real health issues. They COULD do things with their money, but they give me the excuse, “I want to leave something to my kids.”

There are a bunch of ladies who knit BEAUTIFUL things. I said "Want to go with me and will buy some nice cashmere yarn. The answer is always “Oh GOD no!, and they use this cheap yarn.” I mean I guess I’m effected 'cause my dad was one of these who always wanted to go “halvies” on everything. He went to his grave with nothing 'cause he was waiting to find someone to go in half with him.

17

IMHO, he should help the son pay off his own mortgage. Hes probably going to leave it to you now, might as well take some and put it to pay down some of that loan. Whatever’s left can safely be put in CDs and a healthy amount in savings for easy access.

18

The Vanguard Prime Money Market Fund currently pays O.40% interest. That interest is not much, but better than bank MM funds. It is not protected by FDIC but is well managed by a very good company.

Money markets are liquid. When you open an account you’ll get a checkbook to write checks on the account. Mind you, minimum check amount needs to be $250, so you won’t be writing checks for a Starbucks.

I’m still a big fan of laddered CD’s, but what the heck?

19

What is the interest rate on the mortgage?

Dad pays it off, son pays him back at 1/2 to 3/4 of the interest rate he was paying. Everyone wins.

20

Normally yes, but right now money market funds are offering awful interest rates.