photo credit: h.koppdelaney
A reader asked me the following question:
“My parents, in their late 70’s, have no financial needs and a substantial emergency fund. In addition to the emergency savings, they also have $60,000 in a passbook savings account which they don’t know what to do with. They are not interested in taking much risk, but would like to do something better than the passbook. Any ideas?”
I emailed her the following response, but I am asking the help of my readers for any ideas that I may have overlooked. Thanks ahead of time for your comments. By the way, she gave me permission to put this in a post.
“Your parents have a unique situation in that they are financially secure, have a good emergency fund and some “extra” money laying around. They want to do something smarter than having the money in a passbook checking account, but they don’t want much risk either.
I say unique because they really don’t need this money for anything. Not very many people can say that. So, I have several thoughts; some a little out of the box:”
Check to see if they have Long Term Care Insurance.
If they don’t, they should look into getting some. It is possible that they will not qualify for age or health reasons, and the cost will be substantial if they do. Nevertheless, I would put Long Term Care Insurance as a top priority. In addition, because health is a huge concern at this stage in life, I recommend that they get some “stay healthy tips” from their doctors or other health care experts.
Pay off debt, including house.
I assume that your parents don’t have any debt but this would be the first priority on my list. They will “make more” with their money by eliminating whatever interest they are paying on debt than they could earn with any risk free investment.
Find a high yield savings account.
The passbook account they currently have probably doesn’t pay anything, so any interest they could get would be better than nothing. Most of these high yield accounts pay little (currently less than 2%), but the money is FDIC insured so they are absolutely safe. The money is also liquid, meaning you can get to it any time without any penalties.
Consider a Certificate of Deposit.
They will earn a bit more and money is still safe but it is tied up, depending on the term length of the CD. I personally don’t like CD’s for that reason, but it may be a good choice.
Buy some conservative mutual funds.
Now we have risk, but a chance of higher return. Maybe or maybe not a good choice depending on your parent’s risk tolerance.
Have fun.
I am thinking that if they don’t need the money, they should do something fun with it. After all, they have done a great job of managing it over the years so they should make sure they don’t short change themselves. Have they ever dreamed of a European vacation or simply a cruise? Now would be a great time to go for it.
Remodel house.
Maybe they don’t need anything done to their house, but most people have ideas of what they would like changed. This is a way to invest in real estate and enjoy the money at the same time.
Give it away.
I know you won’t suggest this, but I will.
They can give up to $13,000 each per year to any individual without encountering any gift taxes. In other words, between the two of them, they could give up to $26,000 to each child without any tax repercussions. The rationale is that the money will some day belong to the heirs anyway, and if the parents don’t really need it, they could share some of the inheritance now.
Readers: What did I leave out? I appreciate your thoughts and so will the reader who asked the question.
I agree with the mutual fund idea. Since they don’t really need the money, I think they should take on as much risk as they are comfortable with.
This is especially true if they plan on leaving the money to heirs…it is long-term money that should grow as aggressively as possible.
Wojciech,
I too like the mutual fund idea, but I also like the “fun” idea. They could invest much of it in mutual funds and still have some fun. Of course I don’t know the people personally, so “fun” might be something they are already doing plenty of for all I know. It is just that I hope their years of frugality haven’t developed a mindset that would prevent them from enjoying the fruit of their hard work and sacrifice.
If I find out what they decided, I will try to put it in a follow up post.
As always, thanks for reading. I appreciate your thoughts.