If you are helping a senior relative with managing his or her finances, chances are managing investments is part of the job. You are not alone - most boomers either are making or will at some point have to make decisions about their parent's or other relative's investments. Here are some important points to consider:
If your elderly mom or dad has current spending needs, and is not receiving enough income from pensions, Social Security, or annuities to cover them, the investments will need to bridge the gap by generating income. Generating income 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 generate enough income, or if it does, there may not be enough growth to keep up with inflation (discussed below). In this case, a balanced portfolio that includes growth-oriented investments may be warranted. Balanced portfolios can generate current income by liquidating "principal" as well as by withdrawing interest and dividends, and can provide growth to keep up with inflation. The use of growth-oriented investments, and income investments for that matter, involve taking some risk, which is discussed below.
In choosing investments, it is important to consider their liquidity—which is to say, can you turn the investment into spendable cash when your aging parents need it? Certain investments such as annuities, real estate, and limited partnerships may have restrictions on liquidating them and/or substantial fees to sell them. And some take time, effort, and money to sell, such as real estate or a business interest. 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.
All investing involves taking some risk. FDIC-insured CDs, gold coins, even greenbacks hidden in a mattress all have risks, although 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, as discussed below. The primary technique for reducing risk is the use of diversification, which can be summed up as putting your eggs in different baskets. Also very important, though, is avoiding the poor decisions we tend to make in investing, such as buying fad or "hot" investments after a run of good performance or selling good investments after the market has taken a dive. Even if you can avoid selling low due to fear, you may be forced to sell low because you need the liquid cash for a spending need related to elder care. Well-managed portfolios always consider the investor's time horizon and match the investments to it.
Inflation is constantly working to erode the buying power of money. Today's headlines are full of talk about food and energy inflation, but in reality just about everything people need or want gets more and more expensive over time. Another way to look at it is that a dollar provides less and less purchasing power over time. Over the long term, if your investments are not growing by enough to keep up with the cost of living, your "real" return is negative, and you are in essence losing money.
The ability to keep up 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 that can keep up with inflation. Investments such as inflation-protected bonds, real estate, and commodities may also be good inflation hedges. Each of these can be very volatile in their own right, so diversification again becomes important.
Taxes and Expenses
Taxes and expenses are in many cases 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, by the use of tax-advantaged accounts, and with proper tax management. Fees can be minimized by choosing investments with low fees, 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 for investments.
If you are acting under the authority of your aging relative's power of attorney or the trustee of her trust, you have a fiduciary duty to act in her best interests, and to hold them above your own interests. As if that isn't enough, your fiduciary duty extends to her heirs or beneficiaries as well. This means that in managing your senior parent's investments, you are not only expected to consider her needs and objectives, but the objectives of her heirs and beneficiaries, too.
But how are you supposed to consider little Joey's objectives while trying to provide income to pay your mother or father's bills? The answer is: 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.
When it comes to managing investments, it often pays to hire a professional to help you. Financial advisors come in many sizes and shapes, but the best ones to choose are those that act as fiduciaries to their clients. Hiring a fiduciary advisor is one of the best things you can do to help you manage your own fiduciary duty. It will also reduce the time and energy you have to spend on managing the investments. A good place to start is with a Certified Financial Planner (CFP®).
Jon P. Beyrer, EA, CFP® is the Vice President of Financial Planning at Blankinship & Foster, LLC. Read his full biography