Author Topic: CASE STUDY: Parents Retiring, need advice on best options  (Read 10356 times)

cincystache

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CASE STUDY: Parents Retiring, need advice on best options
« on: September 12, 2015, 10:09:12 AM »
Hi All,

My parents have asked for my help with their finances, any advice would be appreciated.

Debt: TOTAL = 82,000
     Mortgage: 80,000 @ 2.7% fixed (house worth ~250k)
     Car:           2,000 @ 1.0% (dependable car with low miles)

Liquid Assets: TOTAL = 730,000 (not including home equity which is an additional ~170k)
     400,000 in a 401k
     200,000 in traditional IRAs
     98,000 in taxable brokerage acct
     32,000 in cash checking account
     
Income:
     Mom is done working as of the end of this year
     Dad will work part time and earn between 30-40k per year for the next couple of years (low stress, enjoyable work)
     Full social security benefits for each of them is about 2,000 per month (starting @ age 66 one year from now)
 
Spending between 48k-62k per year
They plan to spend their social security (48,000/year) as well as withdrawing 2% of their nest egg each year (~14,000/year) the year gap between now and the start of their SS benefits will be filled with current cash savings and Dad's job.


Specific questions:

1. Social Security - I'm a little confused by all the options here (spousal benefits, delaying until 70 to increase income, blah blah), I could probably spend a few hours researching it deeper but if anyone has an easy solution please let me know. My hunch is they should start taking benefits as soon as they reach 66 (full retirement age) and call it a day, this seems simple (although maybe not optimal) to me and gives them plenty of income to support their lifestyle.

2. Roth IRA conversion ladder - They will roll the 401k into a Vanguard traditional IRA as soon as my mom retires (401k is hers). Since their income will go down substantially, I'm thinking a Roth IRA conversion ladder would make sense here only rolling over enough to keep them in the 15% tax bracket. RMD's will take effect @ age 70 but for the next four years would it be a good idea to roll over as much as they can into a Roth IRA while staying in the 15% tax bracket? How does social security impact their taxable income? (ie, if they are making 48,000 per year in SS income, can they only roll over 26,900 minus whatever my dad makes into a roth before hitting the 74,900 limit (I realize I am not factoring in deductions etc.) or can they roll over 74,900 minus whatever my dad earns into a roth and stay in the 15% bracket? Sorry for the long question, hopefully that made sense.

3. Gifting - My parents have expressed interest in gifting to children/grandchildren. Is there an optimal strategy/vehicle for this? should they start doing it now or wait? Their concern is that later in life if they have expensive hospital stays it will drain all of their savings and leave very little in terms of gifts. They'd like to be able to give now and watch their kids/grandkids enjoy the gifts provided it doesn't leave them in the poor house. Any advice or thoughts on this?

4. Asset Allocation - My plan is to execute a low cost index fund approach with about 1.5 years of withdrawals in cash and the rest in 70% stocks and 30% bonds. I'm not hugely concerned about this but if you have strong objections please let me know. I think simpler is better for them.

5. Paying off Debt - I am going to recommend they continue paying the minimums on their debt given the fixed interest rates below 3%. They don't lose sleep over it and I don't think it is a huge deal. Again, open to comments here, but I don't see it as a top priority.

Answers to any or all of the questions would be appreciated. Thanks for reading!

Catbert

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #1 on: September 12, 2015, 12:59:36 PM »
1.  SS, as you know, is a complicated area.  The break even point between taking at 66 versus 70 is around age 82-83.  So for the statistically average person it's a wash.  Do either or both of your parents have great health and a family history of longevity?  Or converselly are in poor health with family history of dying early?  that should influence their SS decision.  Also remember that when one of them dies the survivor will just get 1 SS - whichever one is larger.  Since ages and SS benefit are roughly the same if might make sense for one of them to delay taking SS until 70.  Which ever one survives will collect a larger SS check.

If one decides to wait until 70 to collect what they should do is "file and suspense" at their full retirement age of 66.  If some time between 66 and 70 their health takes a bad turn they can unsuspend.  They will get a lump sum check for what they didn't collect starting at 66 and then monthly checks as if they had taken at 66.  OTOH if longevity still looks good at 70 they will start collecting the higher age 70 month benefit.  (Benefit goes up roughly 8% for each year delayed beyond full retirement age.)

2.. Taxation of SS is complicated and I don't understand all the ends-and-outs.  If possible its best to do Roth conversion before taking SS so that it doesn't impact the taxation of SS.

5.  I agree they shouldn't be in a hurry to pay off debts.  Unless they are very conservative.

 

MDM

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #2 on: September 12, 2015, 01:24:11 PM »
1. Social Security - I'm a little confused by all the options here (spousal benefits, delaying until 70 to increase income, blah blah), I could probably spend a few hours researching it deeper but if anyone has an easy solution please let me know. My hunch is they should start taking benefits as soon as they reach 66 (full retirement age) and call it a day, this seems simple (although maybe not optimal) to me and gives them plenty of income to support their lifestyle.
Consider an analogy: "I could probably spend a few hours researching low cost index funds, but it's easier to pay a broker 1% and have that broker put me into high fee, actively managed funds."  Would you do that?  Given that you are on this forum, I hope not. 
Similarly, it would be worthwhile for you and your parents to spend a few hours (or even more) looking at SS options.  You could start with http://www.bedrockcapital.com/ssanalyze/, and/or read through http://www.bogleheads.org/wiki/Social_Security and follow the links to SS analyzers.
"Easy solution": Have the higher earner defer until age 70, and let the lower earner start at FRA.  But you and they should take the time to run the numbers.
Just checking: has this calculator, http://www.ssa.gov/OACT/anypia/anypia.html, been used to calculate their FRA and age 70 benefits?

Quote
2. Roth IRA conversion ladder - They will roll the 401k into a Vanguard traditional IRA as soon as my mom retires (401k is hers). Since their income will go down substantially, I'm thinking a Roth IRA conversion ladder would make sense here only rolling over enough to keep them in the 15% tax bracket. RMD's will take effect @ age 70 but for the next four years would it be a good idea to roll over as much as they can into a Roth IRA while staying in the 15% tax bracket? How does social security impact their taxable income? (ie, if they are making 48,000 per year in SS income, can they only roll over 26,900 minus whatever my dad makes into a roth before hitting the 74,900 limit (I realize I am not factoring in deductions etc.) or can they roll over 74,900 minus whatever my dad earns into a roth and stay in the 15% bracket? Sorry for the long question, hopefully that made sense.
Roughly speaking, 85% of their SS income (at these levels) will count as ordinary income for federal tax purposes (the IRS ignores the other 15%).  Add that to tIRA withdrawals and any other income to get their total income, and calculate tax from there.  E.g., see http://www.kiplinger.com/article/taxes/T051-C000-S001-are-your-social-security-benefits-taxable.html.
If they are concerned about RMDs + SS causing too much of a tax bite, that might be a reason for both to delay SS until 70 and instead take tIRA withdrawals.  You might try www.i-orp.com for its suggestions on IRA conversion timing.

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3. Gifting - Any advice or thoughts on this?
Make sure everyone says "thank you," for whatever form in which the gift arrives.

Quote
4. Asset Allocation - My plan is to execute a low cost index fund approach with about 1.5 years of withdrawals in cash and the rest in 70% stocks and 30% bonds. I'm not hugely concerned about this but if you have strong objections please let me know. I think simpler is better for them.
Seems fine - good luck!

Quote
5. Paying off Debt - I am going to recommend they continue paying the minimums on their debt given the fixed interest rates below 3%. They don't lose sleep over it and I don't think it is a huge deal. Again, open to comments here, but I don't see it as a top priority.
That looks reasonable.

GizmoTX

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #3 on: September 12, 2015, 02:23:51 PM »
Social security: Have you/they allowed for Medicare being deducted when you arrived at the expected monthly SS benefit? Also, be sure to pay attention to the initial enrollment period for Medicare, which is 3 months before 65 or 4 months after. Timing of enrollment also depends on if the person is still working.

DH & I are both 67. At 66, he filed for SS & immediately suspended, to allow his benefit to grow each year until he reaches 70. Then I applied for his spousal benefit, which is larger than my work history allows, yet this still allows mine to grow. I'm getting $900 monthly after Medicare & we have to pay DH's Medicare premium (set up to deduct from our checking account).

Gifting: I would not recommend this; your parents are in good but not wealthy shape financially. You just don't know what kind of medical care they will need in their final years. My MIL just passed away at 99 & we had to pay for her 24/7 caregiver the last 2 years, but we'll be reimbursed after her CCRC apartment share sells. DH's sister's MIL is still there at 100 & is now borrowing for her care from her CCRC residual. Memory care facilities & nursing homes are expensive.

The other reason this is not a good idea is the effect that "economic outpatient care" has on children & grandchildren, as explained in The Millionaire Next Door. Gifts can condition people to require an influx of their parents' money in order to afford the lifestyle that they expect for themselves, and they are less likely to learn about money, budgeting and investing.




JRA64

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #4 on: September 12, 2015, 05:07:43 PM »
I don't know enough to chime in on most of these but I'll put in my $0.02 on the items I do have opinions on (worth exactly what you are paying for them).

-Social security - definitely go for benefits with survivorship. What happens in all too many cases is the benefits are not set up for survivorship, and when the husband dies - statistically women live longer, and usually men have earned more and have more benefits - the wife's standard of living goes down dramatically, sometimes below the poverty level. Most of my mom's expenses today are paid by my dad's pension, and omg I am thankful he set it up for the survivor benefit. They both worked all their lives, during a lot of their careers she out-earned him, but his pension easily provdes over 2/3 of her income.

-As for gifting, they should read up on that before doing so. I've not had to deal with this, so my information is sketchy at best, but here goes. If one of them needs a lot of end-of-life care, there's a spend--down process to qualify for one of the government programs - I'm not sure if it is Medicaid or a form of Medicare.  There's a five-year look-back in the process. Basically, they would have to cover the costs of anything they have gifted in the last five years before qualifying for benefits. I'm not sure if this applies only to gifts to families, to other friends, or to charities. The worst thing I could imagine happening is giving to someone, and then having to ask for that money back due to illness. My understanding is probably incomplete or flat--out wrong, but I'd research this before giving any gifts.

lizzzi

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #5 on: September 13, 2015, 07:07:49 AM »
I am your parents age (66), and like them, wanted to gift to my adult daughter and s-i-l to make sure they got something substantial before future, hypothetical eldercare costs cropped up, and all my and my husband's money went to health care instead of to the family. (My husband died a year ago, at home, cared for by us.) We had already over the years given them a substantial wedding present and a good used car. At the end of my husband's life, we bought them a $137,000 house, cash on the barrelhead. I don't begrudge them a thing, but would not do that if I had to do it over again. My net worth is around $238,000 in a very LCOL, with monthly income at $3,915 from a state pension, a military pension, and SS widow's benefit. I'm letting my own SS grow until I'm 70, when it will be $2,500. (I have the exact amount, just too lazy to get up and find the folder.) So at 70, income will be $5, 289, with the proviso that the military pension is only until my ex-husband (age 65) dies. He comes from a long-lived family and is in good health, but my income could at some point in my old age drop back to $3,864 monthly. Here's the thing: I would be a lot more secure, and able to live large as well as afford much more luxe eldercare (better assisted living, more aide time, fancier handicapped-accessible facilities in my own home...whatever)...if we had not given the kids so much so early. It actually was my own decision, made when exhausted, grief-stricken, not thinking straight,  blah, blah, blah. P.S. Daughter dumped s-i-l when my husband had been dead two weeks, and she got the house. S-i-l is fine financially, but that scenario was not what I had in mind...house was supposed to be for both of them and the three grands. So tell your parents to keep their money in their own pockets for now. It is too early to be gifting, and even though they are financially on a good footing (as am I), you never know. They very well may need it for a more fancy-pants old age later--or simply for better quality of life as they age. It's nice to be nice, but they should take care of themselves first.

Capsu78

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #6 on: September 13, 2015, 10:13:01 AM »
My wife and I are not that age yet but not that far behind them.  As much as I value the advice of the many smart people who post here, in my mind, my advice to you is to seek some professional eldercare specific financial advice.  I have run a lot of back of the envelope maths and scenarios, but the transition from "accumulation" of assets to "decumulation" needs to be done "inch perfect" with the advice from a fee only tax guy at least.  I think I know what I know, but I still don't know what I don't know and will happily invest in some piece of mind by getting an outside opinion.

As for gifting, I agree its premature IMO.  The conversation with my adult kids is the greatest gift we can give them is to never have to surprise them with our financial shortcomings...and knock on wood, our retirement planning will be a success even if we have to spend down some assets toward the end.  Trying to out clever the tax man by early gifting seems a little risky for the final years of a life well lived.

 

hred17

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #7 on: September 15, 2015, 04:31:20 AM »
Following.

My parents have recently retired and as an only child, we need to have this type of a conversation in more detail very soon. They keep insisting that they are leaving me everything which is great, but I want to make sure we all understand potential medical/care costs, mortgage and SS implications, etc. I  just want to ensure they are not so focused on leaving me something that they don't make plans to ensure they are taken care of as well (my primary concern).

wenchsenior

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #8 on: September 15, 2015, 08:04:19 AM »
I can speak a bit to gifting, but you didn't mention plans for Long Term Care, so let's discuss that first.

So Medicare is insurance for the elderly (two parts, as noted earlier). Part B you have to choose among several options and enroll in a timely manner or you get penalized. Part B is not free, so your parents will need to assume that a chunk of the SS they have been promised will be deducted to pay for whatever part B they choose.

BUT, Medicare doesn't cover long term care or nursing home costs at all, except for limited periods in nursing home or rehab centers after Medicare covered surgery, etc. This is a big problem and most people fall into one of several categories...Low/Middle/or High assets/cash flow.

Actuaries probably have run numbers that I'm too lazy to look up, but elder planners usually seem to advise that if you have assets above 1 million in retirement or a large enough monthly cash flow, you might have enough to 'self insure' (pay for any LTC you might need out of pocket). Depending on whether you have in-home care vs nursing home care, and what state you are in, it runs 100$-400$/day (so not unheard of to cost 150K/year). About half the population will require LTC for some period of their lives, and the average time spent in LTC is a couple of years. Of course, averages don't mean a lot if you get situations like early onset Alzheimer's...then it can be a decade or more. And some people never need it at all. You see the challenge?

For people in the mid range of assets/cash flow (maybe 350K to 1 Million), most financial planners recommend that people consider buying LTC insurance, but it is limited in the scope of how much it will cover, how long it will pay out, and it is relatively expensive. Most companies do not have fixed premiums, which means premiums can be raised under some circumstances. It sucks. Most actuaries suggest that if you are good health, the best age to buy is mid to late 50s, but you have to look at your own health history, etc.

If you are relatively low-asset/limited cash flow, most financial planners will assume you will exhaust your assets paying for LTC until your estate is  gone and you are poor. At that point, you qualify for MediCAID, and the state will pick up the cost of LTC. There are tons of rules governing qualifying for Medicaid, and they vary from state to state, so this needs to be investigated. In WI, my grandparents had a very small pension (maybe 500$/month, and about 2000$/month SS, and no assets except a modest house worth about 180K). They had a couple of very small life insurance policies, which put them over the limit in assests, so they had to cash them to qualify. My grandfather went to a nursing home for 'free' for a couple years until he died, while my grandmother lived in the house and retained their small monthly income. At that point, I think her bank account had grown so she was a little bit over the qualifying limit of assets. So then her kids had to spend about 8K on 'personal items' (clothes, personal care products, etc....their are rules governing what can be bought) to keep her qualified for Medicaid.

*NOTE: There are people on this forum that will yell about the ethics of this, and that is certainly something that everyone has to grapple with and decide for themselves. However, it is legal, if rules are followed, and is often advised by social workers/Medicaid specialists when you are poor and that close to qualifying for Medicaid.

Anyway, grandmother was in nursing home for about 5 years. When she died, the house was sold and the state took the proceeds as 'payment'. There was nothing for the kids to inherit.

Finally, this leads me to your particular situation. Your parents seem to fall into that tricky middle ground of assets/cash flow. They have quite a bit of money, but will it be enough to pay for LTC for one or both? If one person needs care, it can devastate the assets of the remaining spouse, since most states require only leaving the house and about 100K of assets for the remaining spouse to live on.

On the other hand, if your parents haven't purchased LTC insurance, it is likely really expensive to get at their age.

So....gifting.  If they do not have LTC insurance, and suspect based on family history that one or more might need LTC, they need to look into the cost, and consider how long their estate would last if they had to pay for it BEFORE gifting any money, which they might need later.

However, they might be the type of people who sort of shrug and think: oh, well...if I end up spending down assets, that's just the way it is and I want to gift money now. In that case, they need to consider the TIMING of gifting. If there is any possibility that they will be needing Medicaid for LTC (remember, they will need to be pretty poor to get it), there is a look-back/claw-back period (5 years I think, might vary by state) from the date someone first applies for Medicaid. The state looks in detail at the applicant's financial records, and if any money has been gifted to charities or family within 5 previous years, the Medicaid will NOT kick in to cover LTC costs until that equivalent amount is paid by the applicant.

This is done to prevent very wealthy people from gifting ginormous estates to their kids and then going on the state's dime for 'free' LTC.

*NOTE: Again, gifting down an estate is perfectly LEGAL, and is sometimes advised by financial planners depending on the situation, but your ethical comfort with this is more of a personal call.

In summary, if one or both of your parents anticipates being poor at end of life and using Medicaid, then gifting, if done at all, should be done carefully, and the look-back period should be considered (for example, the gift recipient might consider prudently not spending the gift money until the look back period is up, in case it should be 'clawed back').


Axecleaver

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #9 on: September 15, 2015, 09:13:21 AM »
Medicaid rules are complex, but there is a Federal website which can answer many of your questions here: http://longtermcare.gov/medicare-medicaid-more/medicaid/medicaid-long-term-care-services/

Make sure to check the dollar value limits with your state! Every state has different rules, limits, and waiver programs that change how these numbers work together.

Three specific things to look at on the long term care site, are the asset limits, income limits, and estate recovery rules. Unlike traditional Medicaid coverage, which with the passage of the ACA no longer has an assets test, LTC does have an assets test. Your primary residence is excluded up to $536k in equity, as long as one spouse is still living in it, and equity is split between married couples (some states allow up to $830k). Every state has different limits. For married couples, the spousal impoverishment rules allow the well spouse to remain in the home, keep one car up to a certain value, and keep about $119k in assets.

Here's NY's limits from their Medicaid site: https://www.health.ny.gov/health_care/medicaid/publications/docs/gis/14ma029att.pdf

Now, estate recovery rules are really insidious, and many people don't know about them. After your parents die, estate recovery allows the state to recover the cost of LTC from their estate. It doesn't allow them to kick a widow out of her home or seize her assets while she is alive. But, once the surviving spouse dies, estate recovery will kick in and in many cases will wipe out the entire estate. Any gifting must be done before the five year lookback period, which makes it tough to estimate when to start.

Capsu78

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #10 on: September 15, 2015, 09:38:35 AM »
wenchsenior,
Thanks... nice write  up.

I will only add that when we went looking for a long term living situation for my Dad with Parkinsons we were so thankful he had LTC to offset some, but not all of the costs.  We did a site inspection of a half dozen places before deciding and found a wide range of quality of facilities. Some of the places with large Medicaid populations were, to be "tears in the eyes" honest,  little more than warehouses for the elderly.   
You may want to consider if you really want to take that route by choice.   

lizzzi

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #11 on: September 15, 2015, 09:58:26 AM »
The sneaky estate recovery rules...and who knows how they may change in the future...were probably the biggest reason why I gifted so much so early. The government may end up with most or all of my estate in the future...I felt strongly that I wanted my family to have something. (Kind of short-sheeted myself though.) So much of this is a judgement call...we can only research the issues and be as well-informed as possible.

wenchsenior

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #12 on: September 15, 2015, 10:16:14 AM »
wenchsenior,
Thanks... nice write  up.

I will only add that when we went looking for a long term living situation for my Dad with Parkinsons we were so thankful he had LTC to offset some, but not all of the costs.  We did a site inspection of a half dozen places before deciding and found a wide range of quality of facilities. Some of the places with large Medicaid populations were, to be "tears in the eyes" honest,  little more than warehouses for the elderly.   
You may want to consider if you really want to take that route by choice.   

Thanks. LTC is an unpleasant topic and really hard to deal with. Surprising numbers of people don't realize that Medicare doesn't cover any of this stuff.

I think it's important to point out that many posters on this site actively argue against buying LTC insurance; they prefer to self insure and play the odds. I can see this argument, given the rigged/expense of LTC insurance. However, I suspect many who do so are young, feel bulletproof, or haven't had to deal directly with the consequences of paying for LTC. 

In the past 3 years, we have one set of friends (couple in their early 50s) deal with a simultaneous stroke/diabetes diagnosis for one partner. No idea if they had LTC insurance, and they got lucky in that she has mostly recovered. But....she might not have. Or she might have another worse stroke in the future (high risk).

A second set of friends, slightly older. Husband (already diabetic) contracted a rare spinal infection that left him partially paralyzed. They don't have LTC insurance, and now he doesn't qualify for any reasonable policy. Again, he's recovered enough to work, and to move around in wheelchair and on crutches, but it could easily have gone another way.

Then there is my own father: he refused LTC insurance back in the day, assuming with a 2 million dollar net worth and an extremely frugal lifestyle, that he and his wife could self-insure with no problem.  However, she comes from a VERY long lived family (she's got good odds of living past 100). Skip a few years, and huge medical bills for various issues related to my dad have drawn the estate down by about a third. She saw the writing on the wall and took out an EXTREMELY expensive LTC policy on herself. He refused (probably couldn't have qualified anyway). Skip a few more years ahead to now, and they are splitting up, leaving each of them with half of the drawn-down assets, and the possibility of him needing LTC with no insurance. His assets could go quickly, so we're bracing ourselves.

My husband and I also fall into the 'danger' range of assets/income. We're getting ready to buy a basic policy to offset some of the cost.  It sucks because it's going to be expensive (and we're relatively young and healthy). My husband resisted the idea for a long time, but again, he's never had to directly deal with someone receiving LTC among friends or family. I think he's never been inside a nursing home in his life, and doesn't want to believe that could ever happen to him. With recent events, he's starting to think differently.

Sibley

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #13 on: September 16, 2015, 12:42:58 PM »
Speaking as someone who grew up essentially without grandparents - I love the idea of them gifting to grandchildren. Gift time! Involvement! Teach the kids how to sew, bake, cook, knit, fish, woodwork, whatever. Leave the money out of it, or keep it to nominal amounts. That will mean so much more to them in the long run, will give your parents a lot more satisfaction, and won't hurt them financially.

charis

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #14 on: September 16, 2015, 01:26:37 PM »
Have some people considered "gifting" some of their estate to their children early with the understanding that the children would use the money to pay for their parents expenses later on if necessary?  Are is that wishful thinking?

Cassie

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #15 on: September 16, 2015, 05:23:40 PM »
Things like divorce, new spouses, etc can change a married adult child's life so think it is risky to gift $ early that you may need. Some of my Mom's friends did this & definitely lived to regret it.  My parents gifted no $ but tons of quality time with my children that was priceless.

lizzzi

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #16 on: September 16, 2015, 07:07:11 PM »
Have some people considered "gifting" some of their estate to their children early with the understanding that the children would use the money to pay for their parents expenses later on if necessary?  Are is that wishful thinking?

Wishful thinking.

wenchsenior

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #17 on: September 16, 2015, 07:24:50 PM »
Have some people considered "gifting" some of their estate to their children early with the understanding that the children would use the money to pay for their parents expenses later on if necessary?  Are is that wishful thinking?

Not always wishful thinking (my Mom did something kind of like this with a small amount of money), but you do have to be careful.

You can gift to someone that 1) is certain to be trustworthy and not use the money for themselves, but that you trust to use it for your care until such time as you don't need it (in this case, me, and I'm trustworthy); and 2) can manage the money responsibly through the lookback period so as not to lose the principle (me, and I've grown the principle by about 8K over a few years, whereas my mother has kept what she retained in her savings account earning nothing). Our understanding is that we try not to dip in to this money until the lookback period is over, and after that, she can use it for reasonable expenses relating to medical needs, etc., or she can use the interest generated for fun like trips.

But this was previously discussed and agreed on, and she knows I'm not going to sit on the money if she desperately wants/needs it. YMMV.

aj_yooper

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #18 on: September 16, 2015, 08:23:42 PM »
Your parents were good savers and they should have a good retirement; with a 3% withdrawal rate, their assets would yield around $22 k per year now.  With delayed SS of about $32k total income in today's money is $54k.

1.  Take Medicare and use delay techniques on Social Security.  By delaying they can increase their SS annuity and protect their stache.  Read Kiplinger (http://www.kiplinger.com/article/retirement/T051-C000-S004-tap-an-ira-early-delay-social-security.html) and others on this.  This could be a total win for your parents.

2.  Your parents would be in the 15% bracket, if their budget stays as you indicated, which means capital gains is 0% (http://www.forbes.com/sites/kellyphillipserb/2014/10/30/irs-announces-2015-tax-brackets-standard-deduction-amounts-and-more/).  They could live off their cash and brokerage accounts for several years while your dad could put $13,000 in Roths (his and spousal) and $24,000 in a Roth 401k while also working the Roth conversions.  It looks like their total income could be around $90k and still be in the 15% range.  When they retire they will be in the 15% bracket so their 401k/IRA taxes will not be terrible.

3.  Your parents are feeling flush, but they are average.  Don't gift now.  If they can move much of their money to Roths, that will be a wonderful gift, should they not need to spend it.

4.  70/30 is too aggressive for me at the start of their retirement.  I would start more like 50/50 using Vanguard type index funds and ramp it up over time.

5.  Keep the debt; it is cheap and small compared to their assets.


JRA64

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #19 on: September 16, 2015, 09:39:47 PM »
My biggest fear about LTC insurance is that I would pay premiums for a number of years, and then the company would go bankrupt, that money would be gone, and so would my LTC insurance. How does one prevent that situation? I know some people get policies with companies that have been around for a while, but a lot of big companies have failed in recent years, so that's not a guarantee to me.

As for the gifting / wishful thinking scenario - if you go this route, and the person you've gifted the money to does not live up to their end of the agreement, you have no legal recourse to recover that money.

wenchsenior

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #20 on: September 17, 2015, 07:29:11 AM »
My biggest fear about LTC insurance is that I would pay premiums for a number of years, and then the company would go bankrupt, that money would be gone, and so would my LTC insurance. How does one prevent that situation? I know some people get policies with companies that have been around for a while, but a lot of big companies have failed in recent years, so that's not a guarantee to me.


Yes, it is a legitimate fear, I think. I don't really blame people who decide not to buy it.

MayDay

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #21 on: September 17, 2015, 08:54:31 AM »
Have some people considered "gifting" some of their estate to their children early with the understanding that the children would use the money to pay for their parents expenses later on if necessary?  Are is that wishful thinking?

My grandma did.

She "gifted" 5k or whatever the limit was, to each of her 3 responsible children (the 4 losers did not receive a gift).  The 3 kids held it in case she ever needed it.  She knew she would probably spend down her assets and end up in a medicaid nursing home, but wanted to have that 15K available for anything she needed that medicaid didn't cover- new clothes, nicer bedding, etc.  She ended up passing after her house had to be sold to pay the nursing home, but before the money from the house was all used, so she never went on medicaid. 

Pigeon

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #22 on: September 17, 2015, 09:56:53 AM »
Speaking as someone who grew up essentially without grandparents - I love the idea of them gifting to grandchildren. Gift time! Involvement! Teach the kids how to sew, bake, cook, knit, fish, woodwork, whatever. Leave the money out of it, or keep it to nominal amounts. That will mean so much more to them in the long run, will give your parents a lot more satisfaction, and won't hurt them financially.

This.  I had a grandma who had 24 grandchildren.  She didn't have a ton of money or leave us a dime, but some of the best memories of my life are of baking cookies together, taking naps on her porch swing as she rocked us and sang off-key old Irish standards, and sleepovers.  There is absolutely nothing better she could have done.

In your parents' situation I wouldn't be doing a lot of gifting at this point.  I might make modest contributions to 529s for the grandkids on an annual basis.

cincystache

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #23 on: September 26, 2015, 11:17:22 AM »
Thanks so much for the advice and discussion thus far. I put in a few extra hours and have come up with what I think is a pretty good SS plan for my parents (thanks for the advice)
Having the higher earning spouse (mom) delay benefits until 70 while the lower earning spouse takes benefits @ 66 and mom also gets a spousal benefit between ages 66 and 70. This pays off assuming one of them lives past ~80 (knock on wood) and gives the survivor the maximum benefit if one should outlive the other by a large margin.

For the roth conversion ladder, they are going to do that with as much of the traditional IRA as possible to keep them in the 15% tax bracket each year while also contributing 13,000 to roth IRAs until my dad stops working. (I agree aj_yooper)

All - Your points on gifting are very insightful and much appreciated. They are not multimillionaire status and the priority for their money should be taking care of themselves in old age. However, they still hate the thought of giving all of their money to a nursing home facility in exchange for a few poor-quality-of-life years and leaving their children and grandchildren with absolutely nothing.

We might do a combination where gifts are made in small amounts leaving enough assets in their name to still cover a few years of long term care. When a gift is made, it is agreed that no principle will be spent until the parents pass away (in case they need the money back). I realize there is a risk of siblings divorcing/siblings being idiots so this is not ideal but it seems like a good compromise and a better option than giving 100% of their assets to a nursing home and/or the government in the event they need prolonged long term care.

I don't think there is a clear winner in this case given all the unknowns so we'll do a little bit of each to cover all scenarios with the understanding that there will be pros and cons no matter what happens.

wenchsenior- thanks for your analysis, very helpful.


Dee18

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #24 on: September 26, 2015, 12:33:21 PM »
Have some people considered "gifting" some of their estate to their children early with the understanding that the children would use the money to pay for their parents expenses later on if necessary?  Are is that wishful thinking?

I hate to be the bearer of bad news but this is fraud, and illegal under federal law. 

wenchsenior

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #25 on: September 26, 2015, 12:45:20 PM »
Have some people considered "gifting" some of their estate to their children early with the understanding that the children would use the money to pay for their parents expenses later on if necessary?  Are is that wishful thinking?

I hate to be the bearer of bad news but this is fraud, and illegal under federal law.

I'm not arguing the technical point (I'm no lawyer), but how is it that there is an entire sub industry of estate planners/elder law attorneys who specialize in helping people do things exactly like this? You can find all kinds of info online advertising estate planning to maximize retention of estates, including via gifting. So there must be ways around the technical law. Probably because intent is hard to prove.

ETA: I'm not talking about whether we SHOULD ethically try to protect estates, just that technically it is possible. There's been a lot of arguments on other threads about the ethics of going on medicaid, even if you technically have some assets. People have different stances on that, as I pointed out in my post above.
« Last Edit: September 26, 2015, 12:47:30 PM by wenchsenior »

iris lily

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #26 on: September 26, 2015, 12:48:25 PM »
Have some people considered "gifting" some of their estate to their children early with the understanding that the children would use the money to pay for their parents expenses later on if necessary?  Are is that wishful thinking?

I hate to be the bearer of bad news but this is fraud, and illegal under federal law.

I recently had two work colleagues earnestly explain to me that it is government money that will pay for their parents' nursing home care and that's what we do as society, take when it's our turn to feed from the public trough. This, in a discussion about how to shield their assets. Only they didn't use the phrase "feed from the public trough," haha.

cincystache

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #27 on: September 26, 2015, 12:49:03 PM »
Have some people considered "gifting" some of their estate to their children early with the understanding that the children would use the money to pay for their parents expenses later on if necessary?  Are is that wishful thinking?

I hate to be the bearer of bad news but this is fraud, and illegal under federal law.


Hm... I didn't know this was illegal, what if you didn't have any intention of giving it back but circumstances change or you have a change of heart or I was to win the lottery? I couldn't give my parents any money back because they gave me a give me a few thousand bucks a couple decades prior? Interesting

iris lily

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #28 on: September 26, 2015, 12:56:29 PM »
Have some people considered "gifting" some of their estate to their children early with the understanding that the children would use the money to pay for their parents expenses later on if necessary?  Are is that wishful thinking?

I hate to be the bearer of bad news but this is fraud, and illegal under federal law.


Hm... I didn't know this was illegal, what if you didn't have any intention of giving it back but circumstances change or you have a change of heart or I was to win the lottery? I couldn't give my parents any money back because they gave me a give me a few thousand bucks a couple decades prior? Interesting

It means that if your parents give all of their assets away for the reason of sheilding them from nursing home costs and then go on Medicaid coverge, you/they are committing fraud. Fortunately, the gubmnet will, generally speaking (varies in situations and among states) only "look back" no more than 5 years at any monetary gift they gave you. But that 5 year period is expected to change.

Beware and do your homework.

wenchsenior

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #29 on: September 26, 2015, 12:57:18 PM »
Have some people considered "gifting" some of their estate to their children early with the understanding that the children would use the money to pay for their parents expenses later on if necessary?  Are is that wishful thinking?

I hate to be the bearer of bad news but this is fraud, and illegal under federal law.


Hm... I didn't know this was illegal, what if you didn't have any intention of giving it back but circumstances change or you have a change of heart or I was to win the lottery? I couldn't give my parents any money back because they gave me a give me a few thousand bucks a couple decades prior? Interesting

Yeah, this is kind of what I mean about intent. Gifting is most definitely legal...that's why the clawback period is in place...to discourage something that is legal. The clawback period used to be only 3 years, and people managed to shield a ton of assets.  So eventually, it got extended to 5 years. As to what constitutes fraud and how to prove it, we need an elder care attorney to chime in here. Bueller?

wenchsenior

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #30 on: September 26, 2015, 12:59:50 PM »
iris lily,

You say the look back period is expected to change. From where are you getting this info? Who is expecting it to change?  Truly interested.

Cressida

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #31 on: September 26, 2015, 01:12:08 PM »
My biggest fear about LTC insurance is that I would pay premiums for a number of years, and then the company would go bankrupt, that money would be gone, and so would my LTC insurance. How does one prevent that situation? I know some people get policies with companies that have been around for a while, but a lot of big companies have failed in recent years, so that's not a guarantee to me.

Does anyone have an example of an insurer going insolvent, resulting in LTC claims not being paid? States have guaranty funds set up to avoid just this sort of thing. I'd be curious to hear of examples of the system not working. I can imagine an insolvency leading to *reduced* payouts, but I guess I'd be surprised if it led to total default (because the state would step in).

Sibley

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #32 on: September 26, 2015, 01:21:29 PM »
There are also different types of trusts. Depending on the goal, a trust of some sort may be worth considering. But you'd probably need a lawyer to make sure you set everything up right. I know it can get quite complicated.

Cassie

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #33 on: September 26, 2015, 02:05:46 PM »
I don't think it is right to shield assets & then go on Medicaid to pay for your home. I had one grandma that had $ because she lived frugally & when she went into nursing home she could afford it. Everyone in our family thought that was the right thing to do. If she had run out of $ being dying then yes we would have taken Medicaid for her. 

iris lily

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #34 on: September 26, 2015, 03:28:28 PM »
iris lily,

You say the look back period is expected to change. From where are you getting this info? Who is expecting it to change?  Truly interested.
I mean this in a general "don't trust the goobermnt" kind of way. As the population ages and gets more expensive to maintain, why shouldn't that be money to go after?
« Last Edit: September 26, 2015, 03:30:48 PM by iris lily »

wenchsenior

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #35 on: September 26, 2015, 03:31:05 PM »
iris lily,

You say the look back period is expected to change. From where are you getting this info? Who is expecting it to change?  Truly interested.
I mean this in a gerneral "don't trust the goobermnt" kind of way, and as the population ages and gets more expensive to maintain, why shouldn't that be money to go after?

Ok, gotcha.

iris lily

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #36 on: September 26, 2015, 03:34:35 PM »
I don't think it is right to shield assets & then go on Medicaid to pay for your home. I had one grandma that had $ because she lived frugally & when she went into nursing home she could afford it. Everyone in our family thought that was the right thing to do. If she had run out of $ being dying then yes we would have taken Medicaid for her.

I agree, but what's the "elevator speech" to respond to my former work colleagues, both grown men past the age of 60 who believe others should pay? In other words, they should know better.

 My response is : buddy, you all,have NOT paid enough taxes in past years to cover everyone to go into a nursing home. If that's your new goal, tell your Congressman and you will pay more taxes. As will I. And I'm not gonna.

TomTX

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #37 on: September 26, 2015, 04:09:00 PM »
Nobody has mentioned the critical "File and Suspend" PLUS "Spousal befits only" at FRA?

REALLY? This is the key that makes waiting on SS profitable for a couple.

At FRA (Full Retirement Age) Dad does File & Suspend. You MUST pay Medicare yourself, NOT from your SS, or you will get screwed.

Mom then files a restricted application for spousal benefits only at her FRA. Again, pay Medicare yourself.

So, mom draws a half benefit from age 66->70, at which time both parents file for full SS.

If you really want to be brutal about it, you can divorce 2 years before FRA (presuming you were married 10+ years) and BOTH get spousal benefits for 4 years, then get full enhanced benefits at 70. This also reduces your taxable SS income, as the exclusion is higher for 2 singles than for a couple.

Figure out the details for yourself for certain with an authoritative source, and realize that most SSA benefits coordinators will have no idea WTF you are doing, and will give you bad information. There are lots of pitfalls, I have not described all of them.

aj_yooper

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #38 on: September 26, 2015, 04:33:20 PM »
TomTX, I alluded to the Social Security options in the Kiplinger link, but the poster seems more intent on avoiding paying for possible nursing home expenses with their money than with the high probability of gaining more income for the parents by file and suspend or other options. 


cincystache

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #39 on: September 26, 2015, 09:07:52 PM »
TomTX, I alluded to the Social Security options in the Kiplinger link, but the poster seems more intent on avoiding paying for possible nursing home expenses with their money than with the high probability of gaining more income for the parents by file and suspend or other options.


thanks aj and Tom, you and others suggested this strategy earlier in the post and I completely agree that it is the best option.

I appreciate the input.

charis

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #40 on: September 27, 2015, 06:24:07 AM »
Have some people considered "gifting" some of their estate to their children early with the understanding that the children would use the money to pay for their parents expenses later on if necessary?  Are is that wishful thinking?

I hate to be the bearer of bad news but this is fraud, and illegal under federal law.


Hm... I didn't know this was illegal, what if you didn't have any intention of giving it back but circumstances change or you have a change of heart or I was to win the lottery? I couldn't give my parents any money back because they gave me a give me a few thousand bucks a couple decades prior? Interesting

It means that if your parents give all of their assets away for the reason of sheilding them from nursing home costs and then go on Medicaid coverge, you/they are committing fraud. Fortunately, the gubmnet will, generally speaking (varies in situations and among states) only "look back" no more than 5 years at any monetary gift they gave you. But that 5 year period is expected to change.

Beware and do your homework.

I wasn't at all referring to shielding assets, though I can see why it was interpreted as such.

JRA64

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Re: CASE STUDY: Parents Retiring, need advice on best options
« Reply #41 on: September 27, 2015, 05:52:45 PM »
My biggest fear about LTC insurance is that I would pay premiums for a number of years, and then the company would go bankrupt, that money would be gone, and so would my LTC insurance. How does one prevent that situation? I know some people get policies with companies that have been around for a while, but a lot of big companies have failed in recent years, so that's not a guarantee to me.

Does anyone have an example of an insurer going insolvent, resulting in LTC claims not being paid? States have guaranty funds set up to avoid just this sort of thing. I'd be curious to hear of examples of the system not working. I can imagine an insolvency leading to *reduced* payouts, but I guess I'd be surprised if it led to total default (because the state would step in).

I'm not aware of any examples of the insurer going insolvent, or what happened next. It never occured to me the state would step in, this might be something to look into. Thanks.