Maximize the Money when Planning Long-Term Care

Q:

I sold my mother's house, and have $300,000 in the bank to pay for her expenses in the nursing home. I have power of attorney for her finances. My bank advised me to buy an annuity or put money in a floating-rate fund since we cannot tie up her money or risk it in any way. What would you advise and is there a downside to either choice?

A:

There's a lot more I'd need to know about your mother's situation before I could respond fully. Is this her only money? Does she have long term care insurance? (By the way, this is a warning to you to buy LTC insurance.) How long is she likely to need assistance in a nursing home? The average stay is less than 3 years, but Alzheimers could last far longer and cost far more.

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The reason I'm asking these questions is that an immediate annuity -- a check a month for life -- might not be enough to cover rising costs, and you'd want to spend more money in the earlier years, when she's more aware of her surroundings. So you don't want to get locked into a fixed monthly payment. With an annuity, at her death the balance goes to the insurance company -- unless the annuity covers both of your lives. And in that case, the monthly amount would be much smaller. So I'm not impressed with that advice you received about buying an annuity. That will primarily benefit the broker!

By keeping the money in something like a money market fund, you can use the money in any amount in the early months. If it runs out, the state will take over through Medicaid. Make sure the nursing home you choose accepts Medicaid patients when their own money runs out. Otherwise you could be forced to move her to a different, less appropriate facility in her last months.

The other option, a floating-rate fund, also has some drawbacks -- especially in a rising interest rate period. Rising rates mean lower values -- even in a floating rate fund.

I'd much prefer that you leave this money in a treasury-bill only money market fund, such as those offered by Vanguard, Fidelity or T. Rowe Price.

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This is a classic case of "chicken money" -- money you can't afford to lose. And your goal, I'm sure is to maximize the care available for your mother. Hope this helps.

Q:

I turned 70 in April, and will turn 70 1/2 in October. To avoid a double required minimum distribution in 2005, I understand a RMD should be taken before December 31. What withdrawals should I make from my IRA? Does any withdrawal in 2004 count, or only withdrawals between October and December 31? I bought Ed Slott's book, which covers a multitude of RMD info, but didn't find an answer to my question.

A:

Just talked to Ed Slott and asked him your question. Anything you take out in 2004 counts -- it doesn't have to be during that time period.

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