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I'm fairly new to the board, and have a situation I need you Fool's advice.

My mother is 96 years old, in a nursing home. Fairly decent physical health, poor mental capacity. She has a monthly income from retirement, social security and one investment of $1300 a month. Her nursing home and medication bills run $3250 a month. She will be receiving shortly a bequest from her sister's estate of approximately $300,000. I am the only heir of her estate.

My question is how to best use the $300,000 to assure she has the monthly income to pay her monthly nursing home and medication bills and taxes if any (currently she has no tax liability)and if possible retain as much of the $300,000 as possible. What suggestions or recommendations do you have?
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I calculate you need about 7.8% return on your $300K to make up the shortfall in your mother's income. You should be able to come close with a laddered maturity bond portfolio in investment grade bonds. The $23K or so income would incur some income taxes that are not included in the 7.8%, so you would expect to slowly work down your principle covering them, but the tax bill should be about 15% or $3.5K/yr. Your funds should last for well over 30 yrs. Rising costs of your mother's care are probably a greater concern.

To set up a corporate bond portfolio, see the trust department at your bank, a broker, or a financial planner.

If the bonds are investment grade, rated A or better, your risk is minimal. You can get higher yield, but then you take a risk of investment loss.
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Pauleckler writes,

To set up a corporate bond portfolio, see the trust department at your bank, a broker, or a financial planner.

Wouldn't the involvement of any of these "advisors" significantly reduce your returns -- especially for a bond portfolio.

intercst
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Another way you might want to look at the $300,000 is to consider it yours (along with the obligation to provide for your mother's expenses). Work the $300,000 into your own asset allocation. Maybe set aside 3-4 years of the money your mom will need into a bond portfolio and invest the rest for the longer term.

Just my .02 along with best wishes for your mother,

Kevin
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intercst writes: <Wouldn't the involvement of any of these "advisors" significantly reduce your returns -- especially for a bond portfolio.>

I think you may need assistance to develop a bond portfolio that will meet your needs. The ones I mentioned are capable, and if I were you I would meet with all three, ask about their charges, before deciding.

intercst and I both have laddered maturity bond portfolios. Mine are purchased as new issues from the bond inventory of a full service brokerage house. I presume discount brokers also have this service. On new issues you pay no commissions. They are included in the offer price. I suspect that $300K is large enough to get good service from a typical broker without paying major additional fees (but do check it out).

I understand there is a bond site online from which you can purchase bonds directly--for those with some experience.

intercst, please tell us how you get your bonds.

It may also be possible to set this up in a trust to handle minimize potential estate issues.
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Thanks for the advise, I will certainly explore the bond avenue.
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...if possible retain as much of the $300,000 as possible.

Don't forget what inflation will do to nursing home & medication costs.

Instead of putting all the money into bonds, to try to generate the $23500 your mother's yearly needs, consider a 'total return' approach. You ladder 2-4 years' expenses into bonds/CDs/T-notes maturing in 1-5 years. You put 15 months expenses into a money-market fund. The rest of the funds are invested in a stock/mutual fund portfolio.

Expenses are paid from the money-market fund. At the end of the year, if the stock portfolio is up, fund the MMF with stock redemptions, and replenish the bond/CD/T-note ladder or roll the maturing bond/CD/T-note into an extended maturity. If the stock portfolio is down, fund the MMF with the maturing bond/CD/T-note. Do this yearly.

The idea is to let the MMF/bonds/CDs/T-notes provide the cash as they mature while the stock portfolio gyrates in the market. The assumption is the stock portfolio will provide a better long-term return than the bonds/CDs/T-notes, especially if left alone during down periods. This scheme forces you to use an asset allocation model with a yearly rebalancing to provide cash.

Zev
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Zev,
Could you email me your email address? jboykin@easley.net
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Pauleckler asks,

intercst, please tell us how you get your bonds

I use either Treasury Direct to buy 2 or 5 year notes or I look for a 5 year CD from the Bank Rate Monitor site, see link:

http://www.bankrate.com/brm/rate/high_home.asp

For the last year or so the rate on the highest yielding 5 yr CDs have been about 75-100 basis points higher than a 5 yr Treasury note. (Today, the 5 yr note is yielding 6.03%, the best rate on the www.bankrate.com site is 6.83% for a 5 yr CD.)

Note: I live in a state that doesn't have a state income tax, so there is no advantage to holding US Treasuries vs. CDs. In states where there is an income tax, interest on US Treasury securities is usually exempt from the state income tax. You need to factor that into your calculation.

I don't hold corporate or municipal bonds because of the default risk, however small. Since I view my bond portfolio as a haven if we have a repeat of "the Crash of 1929", the small additional yield isn't that attractive to me. My preference for US Treasuries and FDIC insured CDs is meant to protect the absolute downside.

intercst
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I understand there is a bond site online from which you can purchase bonds directly--for those with
some experience.


Waterhouse has an excellent Bond Center. Home more brokerage houses follow on this superb example of how to do something RIGHT!
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My mother is 96 years old, in a nursing home. Fairly decent
physical health, poor mental capacity. She has a monthly
income from retirement, social security and one investment
of $1300 a month. Her nursing home and medication bills run
$3250 a month. She will be receiving shortly a bequest from
her sister's estate of approximately $300,000. I am the only
heir of her estate.

My question is how to best use the $300,000 to assure she
has the monthly income to pay her monthly nursing home and
medication bills and taxes if any (currently she has no tax
liability)and if possible retain as much of the $300,000 as
possible. What suggestions or recommendations do you
have?


I think I would go with Kevin's answer. Treat the money as if it was yours (must stay in mothers name) and it is your obligation to pay the bills. Depending on your desire for risk put two or three years of expenses in a fixed income security. If you have the capital or income, the rest of the money goes into stocks and you sell as you need to. If the investments run into trouble, you pay the bills until the stocks recover.

She should not have any federal taxes as her nursing home and medical expenses should offset a good part of the income.
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At 96, there's not much left to get you besides an accident, so your life expectancy could be one month or another 10 years. I remember when my Granny turned 80, she hoped to live long enough to see me graduate medical school for years later. Now we're going to celebrate her 92nd birthday and she's hoping to live long enough to see the Braves win the World Series again.

Agree totally with the laddered CD/MMF approach over 5 years. That would supply the immediate cash needs, and if you had to take the money early from a CD, you'd only loose the interest, where if you cashed out of a bond early, could loose principle as well. The reast I'd Foolishy invest in stocks. Who knows, ten years from now, you could be celebrating 105. It's more common every year.

JLC
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From zgriner:

The idea is to let the MMF/bonds/CDs/T-notes provide the cash as they mature while the stock portfolio gyrates in the market. The assumption is the stock portfolio will provide a better long-term return than the bonds/CDs/T-notes, especially if left alone during down periods. This scheme forces you to use an asset allocation model with a yearly rebalancing to provide cash.

Zev


I quote above only part of an excellent post. Thanks, Zev. I very rarely print one, but this is a keeper. It's a mini textbook on managing the flow.

FoolishProf
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Zev

In your reply did you calculate the $23,500 needed yearly by subtracting Max earned income(yearly) before you would begin to lose some SS benefits from a
years' N. H. expenses.
What would your proposed 2-4 yr expenses ladder invested in bonds/CDs/T-notes maturing in 1-5 years look like?

zrobin
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