Q: My wife and I are in our early 80s. We are considering going into a continuing-care retirement community with independent living. We live in our own home now, worth about $280,000 to $300,000. We are debt-free. We have a Fidelity account worth a little more than $600,000, invested in about 60 percent bond funds, 30 percent stocks and 10 percent cash. About $160,000 of this money is in regular IRAs. The rest is in a joint account. We also have about $60,000 in a CD at 4.5 percent interest, maturing in November. I won’t renew because I’ll never get that kind of yield again. We have about $30,000 (today’s value) in EE bonds, also at 4.5 percent. They were purchased in 1992, so they will draw interest only for another nine years. Our only income is from Social Security and a very small pension, a total of about $33,000 a year. We take required distributions from our IRA and draw from our other account if needed. The unit we would like costs about $4,600 a month, including our main meal, all utilities, etc. The only added cost is for telephone. We don’t live frugally, but we are certainly not spendthrifts. Our children are doing very well and don’t need our help at all, but I still would like to leave them a little something. What are your thoughts?
A: The rough numbers here are that you have about $900,000 in assets and Social Security or pension income of $33,000 available to support you and your wife as you move into the independent living section of a continuing-care retirement community that has an annual cost of $55,200. This means you’ll need to take at least $22,000 a year (plus taxes and other living expenses) from your savings. The biggest worry most people have is whether they will run out of money, and the answer, for you, is probably not.
The reason has nothing to do with investment returns and everything to do with our mortality. At age 80 there is only a 1 percent chance that a man will still be alive at age 100 and a 4 percent chance that a woman will be alive. The probability that both will be alive is 0 percent — it won’t happen. The probability that one of you will be alive is 5 percent and the probability that neither of you will be alive is 95 percent.
You’ve probably never heard the odds so precisely before, but my bet is that none of this is a surprise to you. In its odd way, death solves a lot of personal finance issues.
Now let’s look at your assets in that framework. If your savings earned absolutely nothing over the next 20 years, you could spend an additional $45,000 a year and not run out of money until age 100. While withdrawals from your IRA would be taxable, none of the money from your other accounts would be taxable. In addition, since it is likely that one of you will die in seven or eight years, that $55,000 annual bill would be reduced somewhat for most of the 20 years.
The amount of money you leave will depend on when you die and what return you earn on your savings.
The hard part here is accepting the idea that you are entering the period that you saved for — the time to spend your savings. Once you do that, I think you’ll find your choice of going into a continuing-care retirement community will make your life a lot easier and less anxious.
Q: I am 83 years old, with diversified banking and investments. Do you recommend investing in I-Bonds?
A: Currently the only “yield” that I Savings Bonds provide is an adjustment for the inflation rate. Eventually you will get your original purchasing power back, but every dollar of inflation adjustment will be subject to income taxes. Another limitation is that you can purchase only $10,000 a year per Social Security number.
Between the amount limit and the promise of taxing the inflation they compensate you for, these securities are just another slap in the face to savers who have already suffered years of abuse from government policy.
I suggest looking for a more flexible alternative, such as a TIPS mutual fund or exchange-traded fund. You’ll still be slapped in the face by government policy, but at least your investment amount will be flexible.
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