If you are helping an aging loved one manage their finances, chances are that making investment decisions is part of the job. You are not alone. Most baby boomers are either currently overseeing an aging loved one’s financial affairs or facing the prospect of assuming this responsibility in the future. Managing personal investments is difficult for many people, but it is a totally different game when you’re doing this on someone else’s behalf. When it comes to handling a senior’s stocks, bonds, annuities and other types of investments, take the following factors into consideration.
Determining Income Needs
If your aging loved one has current spending needs and is not receiving enough income from sources like pensions, Social Security benefits or annuities to cover them, then their investments will need to bridge the gap. Generating income from investments is not just about getting the highest interest rate possible. The traditional method of investing in bonds or CDs and spending the interest may not yield enough income, or if it does, there may not be enough growth to keep up with inflation (more about that later). In this case, a balanced portfolio that includes growth-oriented investments may be warranted. Balanced portfolios can generate income by liquidating “principal” as well as by withdrawing interest and dividends and can provide growth to keep up with inflation rates. However, the use of growth-oriented investments, and income investments for that matter, involve taking some risk.
All investing involves taking on some amount of risk. FDIC-insured CDs, gold coins and even greenbacks hidden in a mattress all involve risks of different types. The primary risks in investing are poor or negative return on the investment, loss of the money invested, and loss of purchasing power to inflation. The primary technique for reducing these risks is diversification. This strategy can be summed up as putting your eggs in several different baskets. Another important tip for minimizing risk is to avoid reacting to the market. This includes things like buying fad or “hot” investments after a run of good performance or selling worthwhile investments after the market has taken a dive. Even if you can avoid selling low out of fear, you may still be forced to sell low eventually if the need for liquid cash arises in order to cover long-term care or medical expenses. Well-managed portfolios always consider the investor’s time horizon and risk capacity when making investment decisions.
In choosing investments, it is important to consider their liquidity, or the ease with which you can turn the investment into spendable cash when needed. Certain investments, such as annuities, real estate and limited partnerships, may have restrictions on liquidation and/or involve substantial fees to sell them. Many investments take time, effort and additional money to sell. Two prime examples are real estate and business interests. Your elder’s investment portfolio must have enough liquidity to meet spending needs as they occur, without having to take losses or pay big fees to liquidate them.
Inflation is constantly working to erode the purchasing power of money. Today’s headlines are full of talk about food and energy inflation, but just about everything people need or want gets more expensive over time. As the prices of goods and services increase, it means the dollar can buy smaller and smaller amounts of these things. Over the long term, if your investments are not growing quickly enough to keep up with the cost of living, then your “real” return is negative, and you are actually losing money.
The ability to keep pace with inflation over the long term is a key argument for including equities (stocks or investments based on stocks) in your portfolio. However, stocks aren’t the only investment with inflation-fighting characteristics. Real estate, inflation-protected bonds and commodities may also be good hedges. Each of these can still be very volatile, so, again, diversification is important.
Limiting Taxes and Expenses
Taxes and expenses are unavoidable, but they are a factor that must be dealt with. They are like termites: if allowed to get out of control they will eventually eat up the whole house! Taxes can be minimized, to the extent the laws allow, through the use of tax-advantaged accounts and proper tax management. Fees can be minimized by choosing investments with low fee structures and by limiting the number of transactions you make. Caregivers must do their homework and understand how much they and their elderly parents are paying to invest and manage money.
Understanding Your Fiduciary Duty
If your aging loved one has named you as their financial power of attorney or trustee of their trust, you have a fiduciary duty to act in their best interests and to hold them above your own. This means that in managing their investments, you are not only expected to consider their needs and objectives, but also the objectives of their heirs and beneficiaries.
But how are you supposed to consider little Joey’s objectives while trying to provide income to pay your mother or father’s bills? Realistically, you may not be able to. But to the extent that it is reasonable to do both, your fiduciary duty is to try and accomplish it.
Get Help from a Professional
When it comes to managing investments, it often pays to hire a professional to assist you. Financial advisors come in many sizes and shapes, but the best option is a certified financial planner (CFP) who acts as a fiduciary to his or her clients. These individuals have a legal obligation to act in their clients’ best interests, which is not a given with all professionals in the financial sector. Seeking help with managing a loved one’s investments will reduce the time and energy you must spend on these decisions, help you feel confident in your loved one’s financial standing, and allow you to focus on other important caregiving responsibilities.