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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Wealth and Income Taxes will be less of a Problem at that age; hence she should not opt for Tax Optimized Strategies as efficient markets price in higher tax discounts than she can realise in her age. Strongly disagree to the non-taxeable RE funds.

I would personally proceed as follows:

  • 200k in Cash (no more than 100k per Bank)
  • 100k in a 5 year Kassenobligation Later aka long-term deposits with Cembra (start with 20k for 2 years, 20k 3 years, … and upon expiry roll to another 5 years)
    => these 300k are your iron reserve for 5 years of extensive care (additional 60k p.a) if she somewhen needs it. They are no risky assets but 100% covered by the Bank funds insurance
  • Invest 100k in Pensimo Swissinvest and ImmoHelvetic each
    => they will roughly pay 6k of dividends, cover half of the required surplus p.a. The funds come with relatively stable dividends, low cost and low leverage/mortgages. Dividends should remain static even if real estate heavily drowns and the value of the fubds themselves go down.
  • Invest 100k in Avadis Strategie Wachstum (60% Shares; 40% Bonds) and set up an automatic withdrawal of CHF 250 per Month;
    => these pay you another 250 to your monthly required funds. Avadis Funds are cheap and absolutely easy to maintain. This is a Zero Touch Investment that any independent Auditor agree with (unlike ETF Strategies and manual rebalancing!).
    => the remaining cost of living comes from the cash amount she carries forward
    => This way can you secure her „ordinary“ living expenses for 30 years

Tellher to enjoy the remaining 100k as she feels like (dining out, theatre, travel, clothes) as she deserves to enjoy live. She cando so as she can fund her life for at least 30 years (RE funds, Avadis and 100k burn down cash) and she on top has 300k to cover 5 years of intensive care. If she lives longer than 100 plus 5 years of intensive care, she doesnt need to feel guilty if the Ergänzungskeistungen cover the remaining gap as she did her contribution to society already.

Clearly… if she is with a solid Bank, there is no need to creat like 4 different Bank accounts :slight_smile:

Regards,

The Tea Lover

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

How is that working?

Looks like there are a few questions on Swiss RE funds. They operate different than REITs. Principle is that target rents are taken. Based on those, the assets are valued using a discounted cashflow calculation. These DCFs are generally performed fairly conservatively and using relatively high discount rates. They further include accrual for taxes upon sale (RE capital gains tax). The interesting thing is that it is very difficult to find investment houses that yeald at the DCF rates; meaning that DCF Values are at the lower end. The current RE bubble further mainly materializes in individual flats but not entire buildings. Meaning that individual flats come at even lower yields. As a consequence thereof, all good real estate funds trade at an Agio, which is given the fact that they systemically undervalue the values of their houses vs. the BATNA we have (in terms of buy-to-lenting individual flats). The Agios further serve as a good buffer in case the bubble collapses. Mortgages are taken out on the DCF Values of the flats. If the market currently prices in an Agio of 30% (aka shares 30% more expensive than DCF Values of the assets)… the RE bubble can in simple terms shrink by 30% and they still don‘t experience any impact in terms of change to their leverage ratio. Even if prices go down further, with a general limit of no more than 30% foreign capital (vs. DCF Values) and a normal ratio of currently about 20%… RE funds will have financial wiggle room and will not need to conduct any fire sales even in case of a fairly severe RE crisis.

In this sense, I would never invest into a RE fund with less than 20% agio… and I see the agio (assuming efficient markets) as a way how the market evaluates how conservative a RE fund actually performs its DCF valuation.

With regard to stability of dividends. Dividens are paid out of rental gains but not property valuation increases. If the RE bubble collapses, it will likely be due to an increase in Interest rates. This will drive Discounting Rates higher (just like Shares P/E Ratios). This will clearly destroy agios currently paid on RE funds. The markets need to drown heavily until the current DCF Valuations will no longer hold. Even if this happens, then the asset values of RE funds may go down but considering very conservative financing this shouldnt force a currently solid fund to firesale assets or dilute ownerships. An increase in Interest rates will drown RE principals but it will not impact actual rents do
Ue. In the contrary, RE funds will given interest increase even be able to increase current rents (given the interest linkage we enjoy here). This way, they may offset part of the value loss with such higher cashflows. Do not expect that they would yield more but they would probably distribute less of their income and support their asset values accordingly.

If the bubble doesnt collaps due to interest increase but the rentees ability to pay high rents… we would then see a shift in buying pattern. As long as you don‘t invest in a fund that invests in luxury appartments, you will be good. Luxury flats will lose out in such scenario but ones with modest rents will just experience an upscale in the class of people that rents them.

Long story short… when investing in RE, you put the principal at risk but you can expect a predictable, stable dividend absolute dividend value. When you mainly look for cashflow, that is a fairly smart investment…

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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:

Dont get yourself confused with the situation that people here in this Forum don‘t know Swiss Real Estate Funds. Its a concept that exists for ages. Some funds are 50 years old and survived even the severe crisis we had 30 years ago. Real Estate Funds are a conservative bread and butter investment that any Swiss financial advisor knows and its a heavily used building block for conservative portfolios.

What matters is that you carefully select the RE fund - don‘t go for a new product, a hip and fancy one, with high TER, high Portfolio turnover or from the big banks. CS is terrible with managing them and UBS as well fails with its newer products.

What truly matters is that you buy a product with an Agio that is big enough. You face a liquiditation risk if you buy RE funds with a small Agio. Use a financial advisor to select your fund and you sit on a stable 30+ years investment that you don‘t need to monitor or change going forward.

With regard to DCV - whilst its clearly interesting fur us to know what it means and what to look out for (conservative discounting rate)… its not relevant for a retail investor. Just like with REITs - you generally don‘t care about how they calculate their NAREIT NAV but just that its done according to the books.

RE funds can actually be compared with REITs. The only differences are that their NAVs are calculated more conservative and with higher scrutinity, that they use conservative financing aka that there is no leveraging issue, that they (provided your advisor selects you a „good“ product) invest in conservative real estate but no speculative assets… and that the NAVs do matter as the are not closed end funds meaning that there is additional scrutinity and control on how they do business and you don‘t face any risk related to dominating shareholders.

Really, RE funds are very common. The concept just neither exists in the UK, US, Germany, Austria, Italy, Spain nor France. Meaning that non-Swiss investors here in this forum probably never heard of them…

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

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My preferences on Swiss Real Estate Funds are as follows:

  1. Pensimo SwissInvest: https://www.pensimo.ch/de/swissinvest/facts-and-figures.html
    Decent fund with very low TER, modest leverage and a fairly stable and secure Portfolio. Fairly low risk investment
  2. Immofonds: https://www.immofonds.ch
    Probably one of the oldest RE Funds around. Decent TER, modest leverage and a very stable and secure Portfolio. NAVs calculated fairly conservatively and hence quite secure (yet in return very high agio). You need to be aware thought that the distributions are at the max; there might be a drop in dividends by about 5 to 10% in the next few years
  3. ImmoHelvetic: https://www.berninvest.ch/immohelvetic.html
    Fairly solid fund with an opportunity to diversify away from Zurich. Okish TER, certain leverage but not problematic, fairly stable and secure Portfolio. In case of a RE bubble, the fund might face a re-financing round but this should not cause any dillution issues.
  4. Patrimonium: https://www.patrimonium.ch/de/
    Tax Optimized RE Fund (neither Taxes on Wealth nor Distributions) with OKish Portfolio. There are not many “good” funds that are tax optimized; so would only take this in case of very high income / wealth taxes. Focus on the French Part of Switzerland (aka bigger exposure to Bubble). Relatively high TER.

Kind regards,

The Tea Lover

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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: !

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