Author Topic: Helping my Parents Transition to Retirement - What to do?  (Read 1802 times)

9ft5wt

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Helping my Parents Transition to Retirement - What to do?
« on: August 18, 2016, 02:21:00 PM »
Hello!

My parents have reached out to me to help them decide which accounts to access, and how, to set themselves up properly for their retirement years. I humbly ask this wonderful community to help me help them make the right decisions here. My dad worked night-shift for 30 years to support us, and my mom went back to school to earn two master's degrees and become a teacher after raising her three kids. They did a hell of a job, and if you can all help me repay them just a little by helping to make sure they are in a good position for their retirement years, we would all be incredible grateful. Thanks so much in advance.

My father is turning 60 in a few weeks and is semi-retired. Currently, he's earning a few thousand a month doing home repairs. He will have to stop that soon due to health issues that will require surgery and rehabilitation. Back problems. Hopefully, he'll be back at it after about a year off. Maybe longer. Maybe not at all, we'll see.

He has the following pensions and accounts:

Traditional IRA: $286,000
401(k): $37,000
Pension: $1300/mo at age 60 OR 1500/mo at age 62
Social Security: $1700/mo at age 62 OR 2300/mo at age 65

My mother is a teacher, age 58, and will continue to work for at least four more years. This will provide decent healthcare for both of them. She may work until age 65 to access Medicare. She'll have a pension coming to her, as well. She's currently making about $80,000 a year. Her pension will probably be about $3000/mo at age 62.

Debts:
Home Loan: $120,000 at 5.2%. Paying about $1000/mo
Car Loans: $17,000 @ 0%. Paying about $650/mo

My father thinks it best to take his pension now so that he has some cash coming in to cover loan payments for the time that he will be laid up after surgery.

My thoughts align with his. He should take the $1300/mo pension payment at age 60, hope to rehabilitate and continue working (he loves it) and then take SS at age 65. Thoughts? Concerns?

My main uncertainties surround their debt and what to do with my dad's IRA and 401(k).

--I'd like him to roll his accounts over to Vanguard at 50/50 stocks and bonds, from his current 'financial advisor'.

--At age 65, he'll have roughly $4,000 of income a month (less taxes) without touching his accounts, not counting my mother's pension. I feel as though they should be comfortable withdrawing more than 4% a year from the accounts to supplement their income (if they even need it) without worrying too much about the future. Am I missing something big here?

--It would be nice to get rid of that debt once and for all, but withdrawing an amount to cover it would bump them up a tax bracket or two. Should we pay this off in a few yearly lump sums that keep them in a lower tax bracket? Keep paying it monthly for the next however many years? Anything I am missing here, or magical ways to use retirement accounts to pay off debts?

If these where your parents, what would you advise them to do?

Again, thanks!


ooeei

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Re: Helping my Parents Transition to Retirement - What to do?
« Reply #1 on: August 18, 2016, 02:28:30 PM »
How much do they spend monthly?  That will help determine an appropriate strategy.

9ft5wt

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Re: Helping my Parents Transition to Retirement - What to do?
« Reply #2 on: August 18, 2016, 02:33:24 PM »
That's a good question and I really don't quite know.

I would estimate that they spend most of what they currently earn, and that there is A LOT of fat that could be trimmed, including those loan payments.

Let's call it $5,500/mo?

ooeei

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Re: Helping my Parents Transition to Retirement - What to do?
« Reply #3 on: August 18, 2016, 02:47:01 PM »
That's a good question and I really don't quite know.

I would estimate that they spend most of what they currently earn, and that there is A LOT of fat that could be trimmed, including those loan payments.

Let's call it $5,500/mo?

I'm sure someone else will chime in with an actual strategy that's detailed and helpful, but here are my thoughts.  They spend $5500/mo, and their pensions/SS total $6000/mo (minimum) once your mom retires.  I'm not sure what taxes are taken out of the pension/SS, but it looks like their expenses are basically covered.

Off hand it seems to me they should wait until 62 for the pension, as your mom will still be bringing in enough money to cover their expenses for the next 4+ years.  After that it's worth running the numbers on waiting or not for the SS, but if their pensions cover all of their expenses, there's not much to worry about. 

Moving everything to Vanguard is a good idea.  Spending more than 4% should be fine as long as their basic expenses are covered by the pensions/SS, it's bonus money, so it doesn't really hurt anything if it runs out. 


All of that is based on them spending $5500/month.  If they actually spend $7000 a month the strategy will be different.  If they're asking for your input, that's important information to have.  A $1000 difference in spending a month is $12k/year, which is pretty much all of their investment income at 4%.
« Last Edit: August 18, 2016, 02:48:33 PM by ooeei »

mozar

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Re: Helping my Parents Transition to Retirement - What to do?
« Reply #4 on: August 18, 2016, 04:30:47 PM »
How much longer on that mortgage? If it's 15 years or more I would refinance. That's a high interest rate. Since they spend so much money and don't have that much savings i would delay pension and ss.

Catbert

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Re: Helping my Parents Transition to Retirement - What to do?
« Reply #5 on: August 18, 2016, 05:02:08 PM »
Are the payments on the mortgage and car the minimum or are they paying extra?  How much longer is the mortgage? 

Since the car loan is at 0% I wouldn't pay any extra.  I'm guessing that the mortgage still has a long life.  I certainly wouldn't pay any extra during the next "lean" year or so.  Can they refi the mortgage for a lower interest rate?  It might be worth doing while they both still show income.

As you know your dad can access his 401k without penalty and your mom will be able to in a year or two.  That provides a nice buffer.  I'm not sure who much sense it makes to do Roth conversions.  Look at what current marginal tax rates are for them and what it will be when everything (including RMDs) kick in.  If it will be a higher marginal rate when SS and pensions kick in it might make sense to "fill up" their current marginal rate with Roth conversions.  My gut tells me they won't be in a higher bracket, but math wizards might say differently.

What does their longevity look like?  The longer they live the more sense it makes to delay taking pensions and SS.

ender

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Re: Helping my Parents Transition to Retirement - What to do?
« Reply #6 on: August 18, 2016, 05:08:30 PM »
Why did they reach out to you?


9ft5wt

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Re: Helping my Parents Transition to Retirement - What to do?
« Reply #7 on: August 19, 2016, 07:44:35 AM »
I think that the ways my spouse and I have changed our lifestyle in order to pay off loans and work towards FI have trickled out in conversations and they think that I might be able to help them a little with their finances. Most of the time I am second-guessing our own strategies, so I wanted to ask this community for some backup.