Investing Advice for Older, Childless Adults

PBS NewsHour business and economics correspondent Paul Solman frequently answers questions from Next Avenue visitors about personal finances, business and the economy. His advice appears on Next Avenue as well as on Solman’s PBS NewsHour blog, Making Sen$e With Paul Solman, and The Rundown, NewsHour’s blog of news and insight.

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Virtually every column that I read regarding money management of (or for) older people assumes that the older adult has children. I don't. What money management, retirement management and estate management issues should a childless, older adult consider as part of his or her planning? (Separately, I know other older adults my age who wouldn't begin to trust their adult children with their finances for very good reasons!) — Patricia M. Bellace

If you don't have children or, even if you do and don't care about leaving an inheritance to them (or to anyone else), money management reduces to a simple question: Will you have enough to see you through your remaining years?

The No. 1 Financial Threat of Old Age

As Larry Kotlikoff often points out in his "Ask Larry" Social Security Q and A on the PBS NewsHour site on Mondays, the greatest financial threat of old age is outliving your savings.

(MORE: The Bad and Good Retirement News for Women)

That's why he almost always recommends waiting until age 70 before collecting Social Security benefits, because that's when the benefits reach their highest point. Social Security is an annuity that will pay you as long as you live.

And speaking of annuities, they are an option well worth considering. You can even buy ones that are inflation-protected.

Financial educator Lew Mandell has written about the virtues of annuities for PBS NewsHour several times.

How to "Immunize" Yourself

For those who can't bear to tie up their money for life in an annuity, the original gelt guru on the Making Sen$e Business Desk, Boston University finance professor Zvi Bodie, has long suggested an overarching principle for money management in retirement — what he calls "immunizing" yourself. That is, you match your investments to your need for them.

(MORE: Smart Ways to Avoid Outliving Your Money)

Practically speaking, that means estimating your cost of living in each of the years ahead and then making sure you will have enough income to cover each year. (If you don't, you should be cutting down on your expenses now.)

Some Tips About TIPS

Under Zvi's guidance, I invested a substantial portion of my retirement money in U.S. bonds called Treasury Inflation-Protected Securities, known informally as TIPS, in the late '90s.

(MORE: Social Security Benefits for Singles and the Divorced)

Zvi himself invested in "laddered" TIPS, so that the bonds mature year after year, to bring him and his wife the money they anticipated needing as they aged — money that comes in the form of the principal and accrued interest on the inflation-protected bonds. Here's a TIPS post from 2011 and another from the summer of 2012 to explain.

But even I, with Zvi's approval, began to run scared on TIPS by the end of last year. That's because they had become so popular (with investors who read Zvi and the Business Desk, perhaps?), the government could sell them even though TIPS were in effect paying a negative interest rate, not counting their inflation adjustment.

That is, investors had to pay more than $1,000 to buy a bond that would return only $1,000 in principal at some date in the future when it came due ("matured") in five or 10 years. The catch is that the bond would also pay interest to cover any inflation over the life of the bond. So investors were buying inflation protection.

A $1,000 bond maturing in 10 years might cost $1,100 — in effect, a negative nominal interest rate. Though if inflation suddenly shot up to, say, 20 percent (a number nearly reached in the late 1970s, by the way), investors would be getting that 20 percent, a lot better than the measly few percent they'd be getting on other pre-inflation era investments like bonds with fixed interest rates.

At any rate, I suggested that TIPS no longer seemed so safe, given their negative yield, and I mostly got out of our TIPS mutual fund not long after, though it had already begun to drop in value. (Most of our TIPS retirement money was transferred to a 3 percent guaranteed fund I'd invested in at TIAA-CREF long ago, as described in the "Running Scared" post mentioned above, a fund unfortunately unavailable to new investors in this era of low interest rates.)

Conservative Investing Is Key

Meanwhile, Patricia, you might go through the exercise of estimating future expenses and seeing if you will have enough money coming in to cover them.

My rule is to invest as conservatively as possible, the older I get, hence the 3 percent fund investment. And to be safe, I do all the calculations for my wife and me under the assumption that at least one of us will live to 100.

You may call that wishful thinking. I call it "ultra-conservative," given my goal: that we not outlive our savings.