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Opinion: Higher interest rates could mean more cash for seniors

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Here’s a common complaint I hear from seniors all the time: Interest rates are so low that it’s impossible to earn enough cash to supplement Social Security.

“Certificates of deposit don’t earn anything,” writes MarketWatch reader Camille: “Until the mid-2000s, you could easily earn 4% on a certificate of deposit (CD). Today, your money does not earn anything, which penalizes small savers and seniors.”

She’s right. Based on rates as I write this, if you put $500 into a one-year CD, you’d get back about $502.76 in 12 months. Wow! Two whole dollars and 76 cents! Probably enough for a loaf of bread or a gallon of gas, but not much else.

Low interest rates are a double-edged sword. If you’re borrowing money, it’s obviously good, but if you’re trying to make a few bucks, no. And this isn’t likely to change in any significant way, given the Federal Reserve’s recent announcement that it plans to keep its key “Fed Funds” rate low until the economy and jobs market picks up steam.

Since things like money-market funds and certificates of deposits are tied to the Fed, that’s tough news for anyone hoping to squeeze more out of their savings.

Meantime, those paltry returns stand in contrast to things that keep shooting up, like the cost of healthcare. I recently reported that drug prices, for example, are rising much faster than inflation, and much faster than the cost-of-living adjustment that seniors typically get from Social Security.

This one-two punch—more money going out and less coming in—is punishing seniors, pushing many closer to, if not into, poverty.

The need to earn more has nudged some seniors into the stock market, which in and of itself isn’t necessarily bad; financial advisers typically say that given the possibility of decades in retirement, even seniors should have some exposure to equities. But with stocks at nosebleed levels—the price-to-earnings ratio on the S&P 500
SPX,
+1.14%

 is up 80% from a year ago—caution abounds. As usual, I’ll emphasize that how much a retiree should have in stocks depends on factors like age, risk tolerance and so forth, and is best discussed with a trusted financial adviser.

It’s often tempting when rates are super low like now to put cash into things with fat dividends, but “you have to be very careful,” cautions Andrew Mies, chief investment officer of 6 Meridian, a Wichita, Kansas-based wealth management firm. “Saying I’m going to go buy a high dividend-paying stock or MLP (master limited partnership, an investment vehicle common in capital-intensive businesses, like the energy sector) were disasters in 2020. Buying high-dividend stocks was one of the worst performing strategies you could have had last year, and some MLPs were down 30-40%.”

In other words, what’s the use of buying something that pays a dividend of 8%, 9% or more—only to see the stock itself plunge by a third? One market strategist, the late Barton Biggs of Morgan Stanley, once said “More money has been lost reaching for yield than at the point of a gun,” and he was right. Echoing that is none other than Warren Buffett, who has called reaching for yield “stupid,” but “very human.”

So what to do?

Mies urges something that many people have trouble with: Patience. That’s because rates, all of a sudden, appear to be moving higher, and if you can wait a bit, you just might be able to find safer investments that yield more than you might be able to get now.

He’s right. As of Friday, the yield on the 10-year Treasury bond stood at 1.34%, hardly robust, but up from 1.15% for the week. Two things to remember here: When bond rates go up, bond prices go down; higher bond yields can also make stocks less attractive on a relative basis as well.

Mies thinks rates will continue to climb. “I think you’re going to have a chance in the next 12 months to put money to work at higher interest rates.” Buying or selling are choices, but so is doing nothing, so “I do think that not getting aggressive right now is probably the most prudent action.”

And after rates go high enough, he thinks municipal bonds could become more attractive, corporate bonds could, Treasurys could. “There will be pockets of opportunity that pop up.”

You may want to consider what have long been considered so-called “widow and orphan” stocks: utilities. “Utilities have been trading as if the 10-year (Treasury) is significantly higher than it is. That could be a spot worth dipping your toe in.” Possibilities to consider—preferably in consultation with your financial adviser—include the Standard & Poor’s Utilities Select Sector Fund
XLU,
-1.17%

and iShares’ Global Utilities ETF
JXI,
-0.54%
.
XLU currently yields 3.3%, while JXI yields 2.78%, certainly more than those measly rates found in CDs or money-market funds.



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My parents made my sister executor of their $4 million estate, and joint owner of their bank accounts. Should I be worried?

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Dear Quentin,

I just found out that my parents (who are in their mid 80s) have named my sister as their successor trustee, and executor of their estate and wills. They have also put her name on all their financial accounts “in case something happens to us.”

I have no reason to suspect my sister of any nefarious motives, but having her name as joint owner on their accounts seems potentially problematic to me in case of their passing. What are the pros and cons of this arrangement?

Their estate is probably worth about $4 million. We have five other siblings who are currently unaware of this arrangement. Can you provide any resources or articles I could show my parents regarding better ways to accomplish their goal of having someone in charge of their finances?

Concerned Son

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com.

Dear Son,

People often don’t do anything nefarious, until they have the opportunity to do so and/or run into financial difficulty of their own. That may not be the case with your sister, of course, but your parents should absolutely know the meaning of making one of their children a co-owner on their bank accounts, if their intention is to merely have your sister assist with bills.

Is she a co-owner of this account, or is she a co-signer? If it’s the former, your sister is a joint owner and can spend the money as she wishes. She would likely be liable for debts on that account after your parents’ death. If it’s the latter, your sister has the right to sign checks on your parents’ behalf. To complicate matters, not all banks have the same definitions for “co-owner” and “co-signer.”

Many people don’t understand the difference between being a co-signer and a co-owner. There are many cases of children listed as co-owners (rather than authorized signers) on those accounts who have emptied their parents’ bank account before and after they died. Sometimes, they did not keep enough (or any) receipts, and have been wrongly accused of emptying a parent’s account.


Many people don’t understand the difference between being a co-signer and a co-owner.

In the letters I have received on this issue,the damage was often already done, typically caused by a combination of the three “Gs” — grief, gripes and greed — when long-simmering sibling rivalries boil over. People do things that they may not otherwise do if their parents were there to witness it. You are correct to ensure your parents’ action is in accordance with their wishes.

There are other ”what ifs”: What if your sister dies first? The account would likely become part of her estate too, with a share to be distributed to her children, which could then involve paying a state inheritance tax. Your parents’ accounts could also be “paid on death” or “transferred on death,” avoiding the public and often time-consuming probate process. Read more here.

The Moneyist: ‘I cut his hair because he won’t pay for a haircut’: My multimillionaire husband is 90. I’ve looked after him for 41 years, but he won’t help my son

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 group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

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S.E.C. Commissioner Hester Peirce on the outlook for crypto regulation, and whether this will finally be the year we see a Bitcoin ETF.





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My husband doesn’t get along with my son. I brought most of the wealth into our marriage. How do I split my estate?

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Dear Quentin,

How do couples typically handle their estates in a second marriage? My husband and I have been married for seven years, and it is the second marriage for both of us. I have one adult child from my previous marriage; he has no children.

I brought the majority of our wealth to our marriage, including almost $1 million in my 401(k) and a nice home that is almost paid off; otherwise, we have no debt. My husband and I bought a second home together. We work hard to fund our new 401(k)s, and own a successful business together.

I am turning 65 this year, so estate planning is long overdue. My husband is five years younger than me, and we are both in very good health. We have two issues facing us: I see our retirement as living very comfortably on the monthly income generated by our 401(k)s, pension, Social Security, etc., and leaving whatever may be left to my son.


‘The other issue is that my husband no longer gets along with my dear son at all, and feels no obligation to get along with him.’

I am not interested in scrimping, but I want to be able to have enough money to last us until age 90 (or beyond) by not touching the principal. My husband is more interested in dipping deep into our savings, and living it up in retirement while we are young enough to enjoy it.

The other issue is that my husband no longer gets along with my dear son at all, and feels no obligation to get along with him, to the point that neither one wants anything to do with the other. As far as he is concerned, my son doesn’t meet his expectations, and so deserves nothing from me and certainly nothing from him.

I want my estate planning to be fair to both my new husband and my son. How do people typically handle this type of quandary? I think that I need to create some type of trust to pass on my share of our estate to my son. My pre-marriage assets involved my son as I pursued my graduate degree through night school and worked long hours throughout his childhood.

Second Wife

You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com.

Dear Second Wife,

Don’t allow your husband’s feelings toward your son to influence your estate planning.

Your relationships with your husband and your son and your own plans for retirement are all fair game when making decisions about your estate, but your husband and son’s fractured relationship is their business, not yours. You worked hard for this money, and your son is your legal heir. Any effort by your husband to spend all of your savings and fritter away any inheritance that you intended to leave to your son should be resisted at all costs.

You have worked too hard your entire life to compromise your plans for a comfortable retirement where you have money set aside for long-term medical care insurance, unforeseen emergencies and/or your son. If you jointly own your home, you can leave your half to your son in your will, and specify it can only be sold after your husband passes away.

If you own the home, you can give your husband a life estate. Your son would pay capital-gains tax on the value of your home when he sells it, and not when you bought it. You could also make your son the beneficiary on your life-insurance policy, and/or gift him a certain amount of money per year to see how he manages and spends that money.

Figure out what is fair to yourself first before moving on to what is fair to your husband and your son. It’s OK to put your needs first. I caution against your dipping into savings at a rate that is beyond your own risk tolerance.

Ultimately, you are entitled to leave all other separate property to your son when you die — and, along with a financial adviser, set up a trust with that in mind for you, your husband and your son. Not necessarily in that order.

The Moneyist: ‘I cut his hair because he won’t pay for a haircut’: My multimillionaire husband is 90. I’ve looked after him for 41 years, but he won’t help my son

Hello there, MarketWatchers. Check out the Moneyist private Facebook
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 group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.



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