Advice for an older person with some assets and short term plans

Hi everyone,

I may have an unusual question here, since a lot of you are on the younger side :slight_smile:

My mother is a bit more than 70 years old, with some health issues. She’s currently staying in an assisted living home, which means she’s renting her own place, and there is a nurse coming once every few days to check on her, plus some alarm system if no movement is detected in 24 hours, etc.

She’s more or less fine now, but in a few years she’ll need to move to a retirement home (APH in German, EMS in French), where the fees are way higher (at least a few thousands each month).

She owned a home that she sold for a large sum, so she has a fortune of about 700’000 Swiss francs.

Currently, her expenses are around 1000 Swiss francs than her revenue (retirement pensions). The expenses are in my opinion well optimized, so we can’t really get lower.

I would like some advice on how to use these 700’000 francs, knowing that we need to get 1000 each month to cover the difference in expenses, and with the knowledge that one day we’ll have to use the money to pay for the expensive retirement home.

Basically, something safe enough for a short term, while gaining something better than the current anemic bank interest rates.

I’m happy to provide more details if necessary.

Thanks a lot for your help!

CHF 700’000 is 2000-3000 per month for 20-30 years, just by eating the principal. So I don’t see what’s your problem here.

You have money comming from pillar 2 pension too, no? Best “safe enough for a short term” investment she could have made was to buy into pillar 2 pension 5 years ago. They have 5-7% conversion rate or so into pension annuity - nothing else is gonna beat this currently, by far. Currently best you can hope is 0% CHF return on non-risky (stock/RE) investments

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Something like :

200k+ in cash

50k in 5 years bank bonds at 1% and 50k in 7 years bank bonds at 1.25% at the Caisse d’Epargne d’Aubonne OR 8 years bonds at 0.8% at Cembra. (=1125 CHF or 800 CHF of interest a year).

150k in swiss residential real estate mutual fund with direct ownership of buildings (3300 CHF of tax-free dividend/year assuming 2.2%. And there is almost no wealth tax on them.)

250k in ETFs (= 5000 CHF of dividend/year assuming 2%)

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This is one of the circumstances where I think a discussion with a fee only financial advisor, specialized in retirement, might add value. Don’t buy any product on the spot but think about the considerations they bring up.

If you have any siblings, be sure to check with them and get their approval for any strategy you may come up with. Inheritances are family shattering topics and how your mother’s wealth was invested, particularly if stocks are involved and they don’t perform well, can be a big topic of dissension when that unfortunate time comes.

As for my own advice:

Considering an annuity if she or you have concerns about the long term sustainability of her situation might be a worth it. Study the product carefully, products that let some money for the heirs are likely to be touted. That’s not what I’d be searching in an annuity, taking a pure annuity and investing the rest of her assets to last for her whole life and more is likely to yield better results.

I’d rule out real estate at this point because of the personal time investment required, unless you hire a real estate company to take care of it all.

That leaves stocks, bonds and term accounts/deposits on the table. I’d build a term accounts ladder for her planned needs. Start the discussion with a bank you trust (your usual bank) and see what they have to offer, then compare with the yields other banks would offer.

I’d invest the rest in a passively managed conservative fund (not 100% stocks), this avoids family problems if stocks go through a crisis or don’t perform well. She probably can take more risk but it may be dangerous for your relationship if risk shows up. One single fund makes it simple and takes any fiddling out of your responsibility.

Keep in mind that 70 y.o. means you’re still investing for a 20 years term, so manage her risk accordingly.

Make sure she, you and any sibling are comfortable with whatever plan you implement.

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This fund definitely deserve an agio, but I think 31% is way too much.

How is that working?

It is true than when you look at the buildings they sell, the price is usually a bit higher than the official DCF value, but not always. So yes, the expert price is quite conservative but not so much. Don’t forget the experts know to some extent what has to be renovated in the next years, while the market only knows the dividend that was paid the previous years (yes the market knows more than that but you get the idea).

I think you are mixing things up. Let’s forget about the agios for a minute, because they are not part of the fund, it is basically the price. If there is a substantial increase in interest rates, or if there is a new law, new tax or whatever (there was new laws in Vaud and Geneva and I heard that if you renovate the whole building at the same time, there is rent control so they “can’t” anymore), the price of the building will go down (or the manager’s ability to create value might be lowered etc.). Yes, the NAV might still be undervalued, but whatever. In this case, the leverage will increase.

In this case, the NAV can loose let’s say 2-3% a year for a few years. Now let’s go back to agios. The agio might completly dissapear. That means you have lost or “lost” a third of your investment.

Now, let’s look at the dividends, because apparently you don’t care about loosing the agios you pay. Even if you don’t look at the smaller funds that have usually more volatility on their dividends, you can take the example of UBS ANFOS. Their stable dividend of 2 CHF from 2005 to 2015 has been reduced to 1.8 CHF for 2016 to 2019.

That makes no sense at all… Even by your own logic, a 10% agio would only mean the experts are better to evaluate the actual future cash-flows, or the rate. And btw, this market is certainly not efficient.

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Completely agree.
It would be interesting to know the cost in EMS to have a better picture. Normally, it’s around 5000.- to 6000.- a month, but people enter in average at 84 years old.

How much monthly is their pillar 2 and AHV currently?

From my POV, the main risk in this situation is to run of money. So one of the best edge would be annuities like https://www.bcv.ch/en/Personal-Banking/Produits/Pension-and-disability-coverage/RP-Rente-viagere

So a combination of High yield account/long term deposition and then annuity when entering in EMS (to check if there is an age limit).

Moreover, you need to think how this will be done practically. Who manage the money? Is the right delegated? Because when you’re 80, it’s become difficult to manage you’re money yourself.

About Agios: is it like market value vs. book value for stocks? If so, I understand it is (even more) complicated to find a “fair” value in RE funds…

No, it is easier. Because book value doesn’t mean anything for a lot of companies. For real estate, the experts - approved by FINMA - use the same method (which make sense) to evaluate the buildings at their fair value. The maximum debt is 33%, so it is similar in all the fund.

But it is true that it is difficult to say if a fund merits an agio of 20% or a disagio of 5%. Most of the time, my model, based 2/3 on history and 1/3 on the NAV, says we must buy when the agio is 10% and sell when the agio is 30%, but it depends on the fund and year of course, and your tax rates.

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Nice! Is this method published somewhere on the Web? I’m super curious. My googling on the topic was not successful…

The discounted cash flow method is a well known method which uses the futur cashflows discounted at an appropriate rate to get today’s value. Basically they look at the future rents and expenses. Usually, it includes the cashflows for a certain period (~10 years) and then they add a last term which represents the value for an infinite time after that. Some funds include a description of the method by the experts in their annual report, but I can’t find them anymore.

Apparently, the SFAMA’s directive, which is the relevant binding document, doesn’t make this method mandatory (theorically speaking), but it does in practice.

The cash value method, the discounted cash flow (DCF) method and other recognized discounted income value methods are recognized as discounted income value approaches.

The law (art. 88 LPCC) only says

Les placements pour lesquels aucun cours du jour n’est disponible doivent être évalués au prix qui pourrait en être obtenu s’ils étaient vendus avec soin au moment de l’évaluation.

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DCF is a standard tool for financial modelling but beware that valuation is highly sensitive to the discount rate they use. You can arrive at any valuation you want by tweaking just this one parameter. If you aren’t the one doing the calculations, treat the result with appropriate amount of doubt.

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Judging by the last few posts (post 6 to 16) in this thread, I think the “older person” should avoid these RE funds, according to the rule “don’t buy what you don’t understand”. I’m not saying the users posting don’t understand it, just that the “older person” (nor Pierre?) is certainly not going to. :thinking:

I would love to read more about them, which ones you suggest etc. Thanks in advance ;).

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I knew that there were plenty of French-speaking people in the canton Zurich, but its inclusion to the “French Part of Switzerland” is audacious :joy: !

The lake of Zurich area is the area regarding Real Estate bubble. The others are only amateurs!

Thanks Tea for all the useful information regarding Swiss RE funds.

Regarding problematic regions, if we trust UBS it seems that Geneva is not anymore in bubble territory:
UBS Swiss Real Estate Bubble Index 2Q 2020

There are still a few questions.

Is the wealth tax already included?

The simplest thing would probably be to put everything in Avadis 60/40 funds with a withdrawal of 1250-1750 per month. The whole range should be pretty save and be enough for expenses, taxes not yet included in the expenses (wealth tax?) and some money to enjoy life.

Zurich is not terrible overpriced compared to other major cities in the world today. If there’s a bubble, it’s global.
https://www.numbeo.com/cost-of-living/prices_by_city.jsp?displayCurrency=USD&itemId=100

And if you take into account much higher local earnings than in most of the competitors, it’s even dirt cheap
https://www.numbeo.com/property-investment/rankings.jsp (#277 in the list by price/income)