OT: Helping my dad with finances post retirement

[marsh]

My in-laws recently sold their house of 45 years in rural Maryland and moved in with us. The house was paid off, but my MIL is in declining health and they were all alone in a remote location. They held off as long as they could, my FIL was the architect, and it was on a little lake next to a nice wooded area. There were more than a few tears shed, they were planning on staying there until the end.
Maybe do what you have to to help your Dad stay in the house a few more years, and keep working on him to think about life after home ownership?

[Ken Robb]

Originally Posted by Frankwurst

Another option for starters is, depending on the value of the second house, sell it on a land contract. Some people would jump at the opportunity to buy a fixer upper without jumping through the bank hoops and expenses with a little smaller down payment. Amortize the the balance over 15 years at an interest rate slightly higher than the banks current rate with a balloon and rate adjustment in 5 years so you can raise the rates if necessary. It might make it easier to sell and provide your Dad with a little extra monthly income. Do not cash out the 401K. The taxes will be ridiculous. Talk to a CFA or CPA on what to do there. Good luck. I hope it all works out well.

I saw a few of these deals go wrong when the buyers defaulted and the not-rich sellers didn't have the money for the ensuing legal procedures to reclaim the property. Even when some of them ultimately "won" they had to get by without any income while the battle raged.

[cmg]

Originally Posted by steveandbarb1

Lesson to be learned here.... Don't over extend yourself as you plan for retirement - make sure house, cars, etc paid off well in advance. Get rid of that too big house before you need to.

well said. many have retirement show up as a surprise.

[Frankwurst]

Originally Posted by Ken Robb

I saw a few of these deals go wrong when the buyers defaulted and the not-rich sellers didn't have the money for the ensuing legal procedures to reclaim the property. Even when some of them ultimately "won" they had to get by without any income while the battle raged.

I'm not saying it's the best option. I'm just saying it's an option. I think if you get a large enough down payment, work references, a release to check the buyers credit scores and various other references to minimize risk it can work. But you are right things can go wrong. It is a gamble. I did it with a house we owned in Florida I needed to sell asap. Not without a few hiccups but in the end it worked.

[Ralph]

The financial situation being discussed is not that un common these days.

Folks retire with decent assets.....at least on a financial statement.....something to be proud of.

However....the assets don't provide enough income to live well. And it can be difficult to sell and restructure the assets to provide that income....with just spending some principal on a regular basis....hoping that can last until death.

A nice home is a nice asset....or is it just a money pit that is a big part of your asset base....and providing no income?

The American dream for many years has been to "own their home free and clear". So what is that worth? Can you sell it when you get old, downsize to something simple, and use that money to rent and pay bills in a nice area? In a low interest rate time for savers who live on income? How many retirees are mentally equipped to rely on income from the stock and bond markets? I'm retired from the financial business.....and I would not be comfortable advising anyone to spend more than $30,000-40,000 per year from a $1,000,000 portfolio of financial investments. And we all know how hard it is to accumulate a 7 figure asset base to live on. Most don't get close.

It's a tough world out there for us retirees. You younger folks think about all this. Skills and jobs you can do part time well into old age not a bad idea. Especially if you enjoy it.

[veloduffer]

Originally Posted by Ralph

The financial situation being discussed is not that un common these days.

Folks retire with decent assets.....at least on a financial statement.....something to be proud of.

However....the assets don't provide enough income to live well. And it can be difficult to sell and restructure the assets to provide that income....with just spending some principal on a regular basis....hoping that can last until death.

It's a tough world out there for us retirees. You younger folks think about all this. Skills and jobs you can do part time well into old age not a bad idea. Especially if you enjoy it.

For work my team just did a study of the US consumer before the Financial Crisis and today.
- About half of Americans don’t have any retirement account (401k, IRA), and those that do, the median balance is $17k for 56-61 yr olds.
- About 38% of ‘middle income’ Baby Boomers expect to rely on Social Security as their primary source of income; before the recession it was less than 30%.
- Medical debt (from deductibles and insurance gaps) are the #1 cause of personal bankruptcy.
- Avg consumer debt is higher than the recession due to auto and student loan debt. The avg auto loan balance is around $31k and duration of almost 6 yrs due to buying more expensive vehicles (namely SUVs and trucks).
- Many state unemployment funds have not been replenished during the economy recovery; the next recession/high unemployment could be significantly harder.

And when you consider that trust funds for Medicare Hospital Insurance (HI) and Soc. Security OASDI deplete in 2029 and 2034, respectively, the American safety net is seriously under stress. With the tax cuts enacted this year, US government debt is 100% of GDP at around $21 Trillion and the annual deficit will be greater than $1 Trillion; in the not so distant future (especially with interest rates rising), interest costs on the debt will be the largest item in the annual Federal budget - larger than Medicare and SS.

I could go on about the structure of the labor markets, etc. but the outlook is kind of dire/dim. The US govt and consumer is too leveraged.




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[fa63]

Originally Posted by veloduffer

The US govt and consumer is too leveraged.

Yep. And all politicians do is keep kicking the can down the road...

[fkelly]

I'd echo the advice to put emotion aside and sell the properties. If you do a careful accounting of the annual costs of maintaining them, including properties taxes, insurance, etc. you are likely to have your eyes opened. That said, in the situation you describe even getting a complete accounting may be difficult.

One thing to beware of in addition to what's been said here. When you go to sell the property, any buyer is going to have an inspection done. And for various reasons, including I'm sure legal liabilities, inspectors are MUCH more particular than they were a decade back. If the place has not been carefully maintained they are likely to find ALL SORTS of issues.

Four years ago I sold my deceased Dad's townhouse in SOCAL. We started out replacing the carpet, repainting, doing some basic electrical fixes, patching up an atrium. Maybe 20 to 30k worth. Inspectors came in and found more electrical that didn't meet code, another 10k. Then a buyer backed out. Another buyer a month later, another inspector. Found mold in a wall. OOPS, containment unit required. A week of rebuilding the wall. Found signs of termites in the attic that the previous inspector had missed. Another 30k down the drain before the place could be sold.

And, if I had waited it just would have gotten worse.

And yeah, get a fee paid certified Financial Planner off the list, but also find a way to check their references carefully. Don't buy financial products that have built in commissions or a percent of assets.

[AngryScientist]

Originally Posted by veloduffer

For work my team just did a study of the US consumer before the Financial Crisis and today.
- About half of Americans don’t have any retirement account (401k, IRA), and those that do, the median balance is $17k for 56-61 yr olds.
- About 38% of ‘middle income’ Baby Boomers expect to rely on Social Security as their primary source of income; before the recession it was less than 30%.
- Medical debt (from deductibles and insurance gaps) are the #1 cause of personal bankruptcy.
- Avg consumer debt is higher than the recession due to auto and student loan debt. The avg auto loan balance is around $31k and duration of almost 6 yrs due to buying more expensive vehicles (namely SUVs and trucks).
- Many state unemployment funds have not been replenished during the economy recovery; the next recession/high unemployment could be significantly harder.

And when you consider that trust funds for Medicare Hospital Insurance (HI) and Soc. Security OASDI deplete in 2029 and 2034, respectively, the American safety net is seriously under stress. With the tax cuts enacted this year, US government debt is 100% of GDP at around $21 Trillion and the annual deficit will be greater than $1 Trillion; in the not so distant future (especially with interest rates rising), interest costs on the debt will be the largest item in the annual Federal budget - larger than Medicare and SS.

I could go on about the structure of the labor markets, etc. but the outlook is kind of dire/dim. The US govt and consumer is too leveraged.

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Hugely interesting, thanks for posting these facts.

Question: when you say half of americans have no retirement account - who is included in the 100% number. is that ALL US citizens, including children, or 18+ people, or?

that figure is startling though, no matter what. scary stuff really.

[saab2000]

Originally Posted by AngryScientist

Hugely interesting, thanks for posting these facts.

Question: when you say half of americans have no retirement account - who is included in the 100% number. is that ALL US citizens, including children, or 18+ people, or?

that figure is startling though, no matter what. scary stuff really.

I got religion on retirement savings about 12 years ago and it was quite an eye opener. Since then I've been a huge saver and my chats with many folks indicates that most people put zero thought into this. At best, they're putting away a few percentage points into a 401k but many people opt out or don't opt in and many people cash out their accounts when changing jobs because they don't realize they are portable accounts from one job to another.

Additionally, most folks have no idea what's in their account and many are in high cost mutual funds that chip away enormous amounts of their savings in fees.

Since I figured this out I've tried very hard to contribute the IRS maximum every year, at the cost of not having a luxury car or fancy vacations. I hope it's worth it in the end.

This thread should serve as a reminder to all of us to be vigilant about our own savings and retirement planning. To use the old cliché, save early and save often.

[MattTuck]

I meant to respond to this thread when it was first posted, but got distracted.

A few things.

First, make sure his 401(k) and other financial holdings are allocated properly for his age/situation... meaning, as low risk as possible. In grad school, I did a project on a person's lifetime investment plan, and did a lot of monte carlo modeling. The biggest take away is that a big hit to your asset base right when you retire is incredibly hard to over come. You don't have time on your side to let it build back up, and you are drawing it down every month.

Second, I'd look into the possibility of borrowing money to renovate the older house, and then rent it out. Having a real asset that throws off cash each month, and that you can write off your expenses against could be worth it. If the rental market is not good, or there are other issues that make renting it out impossible, then obviously don't do that. Best option is probably to try to get him into a 1 or 2 bedroom apartment.

You said he is 65. No idea on his health, but I can tell you about my grand parents. They went through a fair bit of expense in adding an apartment to their house when they were about 82. The idea was that they could have either rental income from renting it out at first, and then when they needed more help, they could offer it for free to a nurse/home health aid in return for care. 2 years after it was completed, they were in assisted living, and 3 years after that, they were both dead. All this is to say that this is not the time to be making decisions with an expected payback of 20 years. Get him in a good situation for the time being. Get his monthly expenses as low as possible, and (as much as this is practical) limit the chances of unexpected expenses.

[veloduffer]

Originally Posted by AngryScientist

Hugely interesting, thanks for posting these facts.



Question: when you say half of americans have no retirement account - who is included in the 100% number. is that ALL US citizens, including children, or 18+ people, or?



that figure is startling though, no matter what. scary stuff really.

For clarification, it’s American households/families. The number was 53% had some sort of retirement account, according to the Federal Reserve Consumer Survey. This doesn’t include pensions, though. However, few companies offer defined benefit pensions any more and many pensions are underfunded (particularly in the public sector) and could see benefit cuts.

Some of this is due to a significant portion (51% of the private, non-farm workforce) of the workforce works in small businesses. Also, only 14% of employers offer a 401k style plan; nearly all large businesses offer a plan.

There’s a debate about whether states can mandate that employers offer a retirement plan or auto-enrollment into state-sponsored IRAs.

TD Economics and the Fed had data that showed that since 2004, the net worth (assets less liabilities) was negative for all households except the top 10% of income earners. Only the top 20% of income earners had regained all recessionary losses. Most of this is due to housing debt and falling prices, but also the increase in student loan debt, particularly with parents’ taking out loans to finance education.


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[veloduffer]

Originally Posted by MattTuck

I meant to respond to this thread when it was first posted, but got distracted.



A few things.



First, make sure his 401(k) and other financial holdings are allocated properly for his age/situation... meaning, as low risk as possible. In grad school, I did a project on a person's lifetime investment plan, and did a lot of monte carlo modeling. The biggest take away is that a big hit to your asset base right when you retire is incredibly hard to over come. You don't have time on your side to let it build back up, and you are drawing it down every month.



Second, I'd look into the possibility of borrowing money to renovate the older house, and then rent it out. Having a real asset that throws off cash each month, and that you can write off your expenses against could be worth it. If the rental market is not good, or there are other issues that make renting it out impossible, then obviously don't do that. Best option is probably to try to get him into a 1 or 2 bedroom apartment.



You said he is 65. No idea on his health, but I can tell you about my grand parents. They went through a fair bit of expense in adding an apartment to their house when they were about 82. The idea was that they could have either rental income from renting it out at first, and then when they needed more help, they could offer it for free to a nurse/home health aid in return for care. 2 years after it was completed, they were in assisted living, and 3 years after that, they were both dead. All this is to say that this is not the time to be making decisions with an expected payback of 20 years. Get him in a good situation for the time being. Get his monthly expenses as low as possible, and (as much as this is practical) limit the chances of unexpected expenses.

The first point is a good one. My father lost about 40% of his retirement assets in the recession, as he was all in equities. For years I tried to have him reallocate but he was stubborn and was trying to get it all back through the equity market. To avoid drawing down, he took a HELOC on the house and used that to fund expenses until he fully tapped that out. The house needs repairs and with the HELOC debt on top of it, my parent’s have to move. We will sell the house “as is” as any prospective buyer would probably gut and reconfigure the rooms (e.g. open space).

I would also add one should hold cash (or in a money market) equal to 6-months of living expenses. This is to avoid the double whammy of having to draw downs your retirement accounts when the market is hitting lows.





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[BikeNY]

Originally Posted by veloduffer

- About half of Americans don’t have any retirement account (401k, IRA), and those that do, the median balance is $17k for 56-61 yr olds.

That is scary! I don't know which is worse, that half of all Americans have no retirement savings, or that the median balance for those that do is only $17k for that age group.

If anything, it makes me feel a bit better about my 401k balance!

Back on topic: I agree, the first thing to do ASAP is get rid of the unused property.

Then you need to work on getting him to realize that his current house/property is just a financial drain now. Unless you or one of your siblings wants to buy it and live in it, it just doesn't make sense to keep it.

Taking the time to calculate the actual costs of the place may help, as others have mentioned. Make sure to include everything!

[kppolich]

If the family properties really mean that much to everyone involved another option is to have your father sell them to someone in the family who has a desire to own and keep them. That being said I would never do this. Someone will most likely take offense if a deal was given to someone else and this could turn into a bigger thing.


That being said, if I valued my parents house that much, I would probably buy it from them and they would continue to live there and take care of the place. I would handle the mortgage and it would be mine when they passed away. Again, I wouldn't do this because material things don't matter that much deep down for my family.


I would still:

1. Sell the other property in need of repair
2. Put that money into the family home
3. See if that makes the mortgage do-able for your dad.
4. Adjust from there.