Investing to pay care fees

Malthusian

noclaf said:

Ok this makes sense, I thought as much. It sounds like cash is the safest/most sensible option.
I'm surprised at the average 2 years life expectancy figure though..my father was in a nursing home much longer...>12 years combined in residential and nursing homes albeit not with Alzheimer's.

It's an average with a long tail. Meaning that the majority of people who go into care homes die within a matter of months (like Dunstonh's client) while a minority go on for yonks and yonks (like your father).

I completely get it if my mother had been putting money aside into a tracker or funds for the last 15/20 years but in this case where a property is sold and you have cash proceeds to invest in a relatively short timeframe how is that done usually and how are suitable investment products chosen? Is it simply a case of low equities exposure or defensive/wealth preservation funds being used?

If someone is in a care home and their attorney is investing some of their cash for the long term it does not necessarily follow that low-medium risk funds should be used. The attorney needs to ensure that the risk of having to cash in their long-term investments is minimal. As for the risk profile of their long term investment, it would depend on the attorneys' attitude to risk, how the donor would have invested if they were still compos mentis, etc.

As others have said it is perfectly possible that no long term investment is appropriate, especially if the donor had never held long-term investments.

tichtich

Malthusian said:

noclaf said:

Ok this makes sense, I thought as much. It sounds like cash is the safest/most sensible option.
I'm surprised at the average 2 years life expectancy figure though..my father was in a nursing home much longer...>12 years combined in residential and nursing homes albeit not with Alzheimer's.

It's an average with a long tail. Meaning that the majority of people who go into care homes die within a matter of months (like Dunstonh's client) while a minority go on for yonks and yonks (like your father).

That sounds like just the right scenario for an annuity, providing insurance in case you're that rare case.

JohnWinder

An annuity is perfect in so many respects, undermined however: if the income from it is marginally adequate and the future costs rise a lot; if it’s not inflation linked; and if the income is inadequate from the start.

You didn’t give us much detail to work on, but consider this: your property sale realises so much money that you would only need to spend a tiny bit of it each year; would some equities be reasonable? I think we can say it would, so now you need to put some realistic figures into that consideration. Montecarlo simulation shows that if the income needed was 2%/year (inflation adjusted), and you invested in 70% global equities/30%cash, and the worst equity returns occurred in the first 5 years of draw down, that the portfolio would fail once in 10,000 cases. So, I’m not sure why we’re writing off equities knowing what we do.

Leaving all the money in cash would seem the safest, except it doesn’t deal with inflation very well. But you can get the same safety, with inflation protection from investing in inflation linked bonds (not bond funds) although you’ll lose a bit as yields are negative now (but you’ll know in advance how much you’ll lose - that’s nice when you want certainty). And better than an annuity, if death comes before the money runs out, you get to keep it. So that seems like two investment options: lots of equities or lots of bonds, right off the bat.

Wealth preservation funds? Nice sounding name, but they’re just a mix of higher and lower risk assets with no promise of wealth preservation, and they cost more than index funds.

noclaf said:

I completely get it if my mother had been putting money aside into a tracker or funds for the last 15/20 years but in this case where a property is sold and you have cash proceeds to invest in a relatively short timeframe how is that done usually and how are suitable investment products chosen?

If she’d been putting money into an equity tracker for 60 years and it was her only asset, and was now the current value of the money you could now put into an equity tracker or your 'suitable product', there would be no difference between the two. Whether it got there by a 60 year journey, or via a minute purchase, it can still lose 50% of its value or less for your 'suitable product' very quickly. There’s nothing safe about equities delivered by a long holding period.

Your decision can be viewed through the ‘withdrawal rate’ lens, indeed perhaps it can’t be viewed without that lens. But working out the ‘sustainable withdrawal rate' (SWR, which won’t deplete the portfolio before death) carries uncertainty because of longevity and investment return unknowns, but you can have a crack at it. Have a look at an investment simulator like portfolio visualiser, to get an idea of a SWR for your circumstances. Then get an annuity quote, and see what its ‘withdrawal rate’ is. 

One would expect the annuity ‘withdrawal rate’ to be higher than the SWR, because the insurance company is getting the benefit of pooling with both the market and longevity risks.

If your spending needs are less than the SWR, you can invest safely. At the other extreme, if they’re higher than the ‘annuity withdrawal rate’, then you haven’t got enough money, plain and simple, unless you’re luckier than I am with premium bonds. If your spending needs are between the SWR and the ‘annuity rate’, you’re in difficult territory as to choice; no easy answers.

Your situation carries three risks, as does ours in retirement: longevity; market risk; inflation. With an inflation indexed annuity you hand all those risks to the insurance company; that makes it a great choice.

If your spending needs are below the SWR you only have to handle volatility, with a cool head, sensible asset allocation and diversification; and those last three are the crux of it after a long ramble.  If your spending needs are greater than the ‘annuity rate’ then the sequence of returns risk is a big challenge.  Can you resolve this for your mother by ’subsidising’ her costs through a bad early sequence of returns?

Good luck, if you need it.

Sea_Shell

Is the crux of the decision making resting on "what would the donor do?", rather than "what would the attorney do?".

Should an attorney remain constrained by the previous history of the donor's financial management of their affairs?

I realise that one has to act in the best interests of the donor, but at the same time, can they also act in a way that any "prudent" person would do.   i.e. someone with some financial nous.  

fred246

I managed to end up with an SJP adviser. He said it would cost 7 years of fees for an annuity. I knew the average was stay was less than 2 years so just laughed at it. I thought he might want to try and invest the money to get some fees for himself but even the SJP man didn't try that. Just went away luckily. In the end they were 1 year in the home. You have to remember that times have changed. They keep people in their own homes for years with carers nowadays (whether appropriate or not) so they go into care in a worse state than they used to.

LHW99

fred246 said:

I managed to end up with an SJP adviser. He said it would cost 7 years of fees for an annuity. I knew the average was stay was less than 2 years so just laughed at it. I thought he might want to try and invest the money to get some fees for himself but even the SJP man didn't try that. Just went away luckily. In the end they were 1 year in the home. You have to remember that times have changed. They keep people in their own homes for years with carers nowadays (whether appropriate or not) so they go into care in a worse state than they used to.

This is very true. My mother was a matron of an old people's home in the 70's, and the majority of the residents were independently mobile, used to head off on regular coach trips and were allowed out to the shops whenever they wanted as long as they let one of the staff know.

It's different now.

noclaf

Op here, thanks for all the detailed input..need to have a read through!

noclaf

JohnWinder - great post above and much of what you mention re. Equities is my line of thought but many unknowns at this point and I am also going through a long drawn out probate process for my father's estate so limited options at the moment with regards to the house but situation should be clearer in the next few months.
Going back to the Equities subject, I was thinking once proceeds are received from the sale of the property, retain most in cash accepting inflation will eat away at it but invest a proportion in Equities and maybe a split as you suggested e.g: 70/30 or 60/40 etc However the Equities risk makes me a bit nervous esp where markets are sitting at the moment: let's say we have a total of £200k cash, my mother goes into care and her annual care costs are circa £30-40k per year (ballpark figures based on my dad's care costs). I would want to retain minimum 2-3 years worth of care costs as cash so £120k ish and then the rest could be invested... (though aware an S&SISA single tax year limit is £20k). Let's assume the £80k is invested into Equities 70/30 split and then we have a huge market crash...the £80k becomes £48k.....that's a huge hit and then how long will it take to recover? I'm using pie in the sky figures but just to illustrate the risk. 

 *It could be that I'm over-estimating the equities risk or probability of a big crash who knows... though for context my pensions and investments are currently invested 100% in equities....it will either be a genius masterstroke or I will be crying myself to sleep when it all comes tumbling down but I have at least 20+ years to retirement so I've decided it's worth taking that risk for now.