OT: Helping my dad with finances post retirement
 

I'm trying to help my dad figure out how to manage his retirement, and hesitated to post this here, but you guys have never let me down...

TLDR version--should he take a lump sum distribution from his 401(k), take small distribution as needed, or consider an annuity?

Long version--
My dad was nudged into retirement a few years earlier than he had planned and due to a few other factors, is now strapped for cash.

Some backround:
He is 65.
He has a 401(k) that he hasn't touched yet
He has a mortgage (reverse mortgage that just converted back into a "traditional" mortgage)
He is in decent health, but not great.
My mother passed away a few years ago from cancer and he is on his own.
He owns his parents' house outright after their passing about 10 years ago, but the house has since been unoccupied and is in need of serious repair before it could be sold or rented (roof, furnace, windows, electrical system, etc.). As-is, this property could be sold for about 1/3 of his outstanding mortgage on the home he lives in.


Right now, his Social Security check and some other part-time work he has been doing is not enough to cover his expenses. Mainly due to the mortgage payment that just kicked in this month. We (his kids) didn't really know about the reverse mortgage, or at least the extent of it, until he just opened up to us recently that come next month he won't have enough money to make the payment. If he works any more, it will just eat into his SS check and with his skill set and health he is not really able to find another full time job that would pay enough to make things work.

Without the mortgage payment, he would be fine. Selling the home he lives in now isn't really an option--it's been in the family for a long time and is very special to him (as well as the rest of the family).

He has enough money in his 401(k) to pay off the mortgage, and still have some leftover, but if he takes a huge distribution to pay off the mortgage he will end up paying a bunch in taxes on the 401(k) distribution.

He has spoken to a few "financial advisors", and they keep suggesting annuities. Everything I have read about annuities is that they are only good for the person that sells them.

Right now, we are looking at either selling his second home as-is or whether or not it makes sense to rehab and then sell as move-in ready. It's in a good town with a very active market, and I know filippers would be lining up for the opportunity to turn $100k profit on it. It's a few hours from where he lives currently. He inherited it when the market was hot so his basis will be significantly higher than any selling price, so no capital gain to worry about.

My brother and I will be helping him make ends meet in the short term, but it's not a sustainable option so we are trying to find a long-term solution.

I guess my main question is what to do with the 401(k)... Should he roll it into an IRA and just take small distributions as needed to fund his day to day expenses? Or should he consider an annuity? Long term, we will work on either fixing house number 2 to rent to provide him with extra monthly income or sell in order to decrease his mortgage, but either way this will take several months.

Fixing up neglected houses when you can't do a lot of the work yourself is EXPENSIVE and it's very common to find hidden problems that lead to big increases in the anticipated budget. An owner of limited means can easily run out of money to finish a re-hab so I don't think it's a good idea for your dad to try to maximize his return by fixing up the house before selling it. In San Diego there are a couple of companies that will buy homes "as is" or work a deal where an owner contracts with them to fix it up without the owner putting in any cash and then they share in the increased value when the home is sold. These companies are also brokers so they handle the sale and the remodel. I was skeptical about these guys at first but they seem to be doing a good job. A run-down house next to a rental I owned was transformed and quickly sold for a good price by one of these companies. Because they have their own crews the work gets done quickly and they probably have formulaic options for kitchens, baths, etc. for economies of scale.
I was a real estate broker for 36 years so now I'll shut up and let Ralph and some of the financial gurus chime in.

Sell both houses and take regular distributions from the 401k as intended. Start living and stop worrying about stuff. It's retirement, he's at this alone so who need a whole house to take care of, let alone 2? Sell them both, or sell the inherited one and get a condo. Then sell the other one to cover it and use the money to enjoy retirement.

Thank you for saving me the time by writing exactly what I would write. I would also add there plenty of rich widows to court.

I would add retiring in California is a luxury.

I went thru this process with my folks a couple years ago...

He does not need the second home so that should be the first asset to go.

Regarding his primary, my folks also had had a house that was very dear to them...they built it, raised 7 kids in it, it is where we all gathered for holidays, they entertained their friends there for 40 years...

However, the bottom line was that it was their biggest asset and they had a cash flow problem...it was time to sell it. It sucked, but it is what had to be done.

We did end up using the proceeds to buy an annuity for my folks, but luckily my wife is in the Wealth Management business and knows who to trust. It provides them with income they need at a return that was not possible with other safe investments.

We started with figuring out his budget...what does he spend his money on, what is necessary, what can be cut. Then figure out the income and asset side of the budget. Then with a trustworthy financial advisor, come up with a plan.

I would be cautious of letting him speak with financial advisor alone...he is right in the middle of this crisis and might be too emotional to make logical decision.

I don't have any advice for the 401k other than you get taxed as you withdraw the funds so it is typically better to do it slowly over time rather than all at once...a CPA or CFA would be the person to talk to about this.

Good luck...

PM sent! :hello:

It's difficult to advise from a forum like this.

If he sells both homes....would he be able to pay rent somewhere? Rent is pretty high lots of places. Around here hard to rent much for less than $1500-$2,000 per month.

While reverse mortgages have some built in extra costs.....they do allow folks to stay in their home. If the home is increasing in value 3-4 percent a year....taking income of same amount from home with a new reverse mortgage for a while would give him some time to prepare, without uprooting him from where he is comfortable. Or at least....stop the requirement of him paying a mortgage. Maybe for a short term fix.....you might look into another reverse mortgage for him. His house is just one of his assets. Might as well put it to work. You can sell a home with a reverse on it same as you can sell one with a regular mortgage. You get at closing what is left after the mortgage is paid off.

A friend of mine in his mid 70's had a mortgage on a nice home....with a lot of equity. He became unable to make his payments....so he switched it over to a reverse mortgage. Now instead of him paying on his house....he gets money from his house. Sure the mortgage has some extra expenses, and he is spending his kids inheritance, but he won't be kicked out of the house until he dies (or just decides to sell it)....then the kids can sell the house, pay off the mortgage, and split the remainder....if there is any.

Doesn't sound to me like anything you do...take 401K or whatever....makes the burden of his mortgage payment easier. Big tax bill from sell off part of his retirement plan probably more than cost of a new mortgage. Spend down the house value, and let the 401K grow. it all balances out.

All investment products are just tools. Use what you have.

Sell the older house that needs work. It may cost more to fix it than it's worth.

Go back to a reverse mortgage on the house he's in now. Get cash flow going the receiving direction.

Roll the 401K into an IRA with Schwab or Vanguard. They both have low cost index ETF's and mutual funds. Try not to take any distribution until you have to (age 70.5). If you decide to do a rollover make sure to do it electronically. Fewer problems that way. Ask me how I know.....:)

I just renovated a log cabin in the Adirondacks and am renovating my home as well. The costs of building materials is high and if I were to have to pay for the labor it would have been at least double what I have into both.

I agree with kppollich and joost. Sell the home he inherited and if he can't make ends meet with that sale then it's probably time to sell the other home and find more cost effective living. I had the opportunity to buy my childhood home and I passed on it. Sure there were memories and sentimental value, but when looking at overall costs and the market I decided that a smaller home with a little more property was a better fit for me and my family.

Sometimes it's hard to prioritize things when we have an emotional attachment. Looking at things from a logical perspective can help separate some of those feelings. Hope it works out well for you all.

i agree with the others, and i'll put it bluntly, to be helpful with my best advice.

you (kids/family collectively) should to get together and convince your dad that the sentimental attachment to the house is not worth going bankrupt over. take some pictures, and cherish the memories you have. cut the ties to the physical property, as the days you remember there are gone. sell the houses and let your dad live the rest of his life off the equity he has earned over his life.

i speak from experience here. the sooner you make the hard (probably inevitable) decision, the better you'll all be.

Is your father rational, highly emotional or totally mentally detached from the situation right now?

That will be 95%+ of the battle.

The other ~5% can be figured out objectively for best outcome/strategy with help of a good financial (i.e., future investment as well as tax side of the equation) and estate planning professional.

That's my $0.02.

I've unfortunately been thru what you have with an elderly relative, and then some believe me. Cashflow is king, unrealized equity doesn't pay the bills.

Importantly, try to keep some balance for yourself. You'll be better off for it. Good luck with it all, it's a lot to take on--willingly or unwillingly.

This kind of re-framing of the story might help:

The house you grew up in was a wonderful place to raise a family and now he has done that, and with success. Its time to move that great house on to another family so they can raise a family in it.

Also on the other house, plenty of people need a place to live and moving that house on to someone else might a be a kindness to the new owners.

My other thought is whether he’d fit into your home? If all concerned got along OK, it might be a good solution. Just be sure it made everyone truly happy. Let him slip you a little money now and then to feel like he’s paying his way. This may or may not be appropriate but I’d probably do it if I needed to. I am about the same age as your father and if I needed to I would do it as long as it was a happy thing for all.

Lot's of good advice. All that I have to add is to keep all siblings or interested parties (those who may lay claim to any inheritance - even if there won't be any) in the loop and document that you did. There's always someone who did nothing while their parent was alive but had plenty of complaints about how things were managed once they are gone.

Great post Henry!!!

I like this.

The annuity idea seems very bad. So does the lump sum 401k distribution.