Author Topic: Mother needs retirement help  (Read 2858 times)

dragonwalker

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Mother needs retirement help
« on: May 12, 2015, 01:36:59 AM »
I wanted to get some opinions from all of you about my mother's best options for retirement. My mother is currently 62 and has her own business as an acupuncturist. Her annual adjusted gross income is about $40,000. She owns 2 properties free and clear. One property is in northern CA and is currently being rented out for $2,800 and is valued at about $620,000. Her primary residence is not being rented out and is valued at about $700,000. She has about $70,000 in a traditional IRA. She has about another $100,000 in cash. She has no debt. She believes that she will be able to work for a few more years perhaps to 68.

She is single and probably will not remarry. She has said her social security income at 70 will be about $2,000 per month and $1,500 at 67 (whatever the regular retirement age is). Her health is generally good however in the past few years she has had a lot of difficulty with hip pain and it is looking very likely that a major surgery for a hip replacement will be necessary in the next few years. Her hip now and likely even after the surgery will make her mobility very difficult in her existing home which has several levels.   

She is strongly considering purchasing a smaller condo where she can comfortably live on one level and rent out her existing home for about $3,200. However, she will only be able to qualify for a loan of about $200,000 for a condo with HOAs of about $300. My mother would like to find a 2 bedroom condo or townhome in a decent area to live (probably on her own) and rent out the two homes. The condos she is looking at are going for about $300K+ and closer to $400K.

At near $400K she won't even have the cash to purchase a condo. She may have an option of using/borrowing money from my grandfather (about $100,000) for this condo. However my grandfather would likely want to be paid back at comparable level and rate as the bank.

I'm not quite sure what my mother's best options are to secure her retirement. The money in her IRA is not well optimized and I'm working with her on that but even a modest return won't really yield any significant amount. Her health situation dictates that she will need to find another home. Ofcourse using any of the IRA money will incur a tax liability a good deal higher than if taken during retirement but she is open to opportunities. 

We have considered various options involving selling one or both homes but it seems that value of the rental income is to much to overcome. We have even discussed purchasing a home together however it's difficult for me to justify this as it really wouldn't help me and my mother would prefer not to do that anyway.

She has considered moving in with a friend but fears that the friend she wants to move in with is a good deal older and it would be challenging to deal with a situation that might cause her to relocate at an inopportune time.

My mother really isn't a mustachian at heart by any means but her spending is generally reasonable all things considered but she feels her income situation at retirement will be lacking. I am her only child and if my grandmother's health was an indication, my mother will eventually need a increasing level of personal care (my grandmother did pass away at 85 from chronic heart failure but was in poor health the last few years). 

I just wanted some thoughts from the bright people here about what she could do in this situation.

former player

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Re: Mother needs retirement help
« Reply #1 on: May 12, 2015, 03:39:14 AM »
How much of that gross earned income of $40,000 is left after expenses - ie what is the annual profit?  I suspect that it is rather less, which is why your mother is clinging to the rental income.  Also, what are her annual living expenses?

The obvious answer is for your mother to sell both properties, buy herself something suitable, and stick the remaining one million (roughly speaking) into decent investments which at a SWR of 4% will give her an income of $40,000 per year.  Depending on what your mother's annual living expenses are, some of that can accumulate while she is still working.  Added to the expected social security income kicking in in either 5 or 7 years, she should be well set.

You just have to get her over the hurdle of selling the houses, which is probably easier said than done.

MrsPete

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Re: Mother needs retirement help
« Reply #2 on: May 12, 2015, 06:12:11 AM »
I agree:  Sell the houses, and use the proceeds buy a small one-level condo.  As she grows older, she may find herself less able (and interested) in the work that goes along with being a landlord, and her retirement income may not be enough to take care of the emergencies that home ownership sometimes entails (i.e., my heat just went out -- get me a new furnace tomorrow). 

With a paid-for house and work expenses off the table, her social security sounds like enough to cover one person's expenses at a minimal level, and then she'll have some savings as well (more once she sells the two houses).  I don't think this will provide her with a cruise-twice-a-year and pay for the grandkids' college type of retirement, but I think she'll have enough to be comfortable without excessive financial sacrifices.  I think she'll have enough income to go out to lunch with friends, take part in the activities that interest her, etc. 

You said she was interested in moving in with a friend -- how about having the friend move in with her in her new condo?  Having a roommate would stretch her dollars, but if she does it in HER OWN HOME, she may face the issue of the roommate needing to go into assisted living (or similar), but she herself won't be put out, as you say, at an inopportune time. 

RexualChocolate

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Re: Mother needs retirement help
« Reply #3 on: May 12, 2015, 07:50:59 AM »
Yea this is craziness. Those houses are a non performing asset. They should be renting at higher levels or sold. 6% ROA(meaning 0-3 return after expenses, probably negative) on a depreciating asset is garbage.

Liquidate everything, take 400k and buy a 2bdr condo. 900k MM in invested assets means 36k a year + 18k a year from SS and spending less than 40k a year means she's insanely secure. 2 Houses, not so much.

She can quit working ask soon as the checks from the sale of the houses clear even if the taxes on the gains in the house reduce the equity

aj_yooper

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Re: Mother needs retirement help
« Reply #4 on: May 12, 2015, 08:33:31 AM »
You are a good, conscientious son!

I agree with selling all the houses, investing the proceeds, and buying a 2 bedroom (no mortgage) one level condo or townhome, with consideration of a roommate.  (Good point, Mrs. Pete!)   I would delay the Social Security until 70 to max out the benefits; she should study her SS choices carefully and arrange an interview with Social Security to find out her options.  She is currently single, but she may have some spousal claim options.  Hip surgery, if necessary, has really evolved so the recuperation may not be as bad as imagined, but aging in a one level space is definitely preferred.  I think she would be better off to continue working as long as she can for income and social interaction.  I would move the cash to Roth IRAs starting now so she would have extra tax free advantages on her savings.  At 70 she will have required minimum distributions from her IRA. 

For me, the nub issue is the budget.  What is her net cash flow from the rental and her job and how is it spent?  It is usually easier to cut expenses rather than gain on income.  There probably are some quick gains to be made by optimizing her expenses.  So, I would concentrate on tracking expenses closely by spreadsheet or whatever device works for her.   YNAB works well for us and has helped us focus our spending.

Your mom is not in a bad spot, but she needs to adjust and tinker with her income and investment plan and focus for a happy, long retirement.

dragonwalker

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Re: Mother needs retirement help
« Reply #5 on: May 12, 2015, 10:33:39 AM »
Thanks everyone for the advice. It seems the unanimous choice is to sell and reinvest. The mother would be highly resistant to that seeing is that she really believes in the value of tangibles. She has always been intimidated by the market and fears what would happen in a general market down turn. I've tried to explain to her that a market down turn is bound to happen but the idea is to stick the whole course and wait for a recovery. Not to mention the enormous tax liability alone of simply selling would probably turn her off to the idea. 

Also, although I'm comfortable investing my own money I am not as confident advising my mother to make such a big decision and go into something she would be very unfamiliar with. Essentially taking the advice on these forums would be shifting her retirement responsibility to me. The problem being in the event of a huge market down turn regardless of how well I inform of it happening is that I will definitely get the "blame" for at least how long it is down and the fact in a panic I could see her cashing out which would be truly terrible. 

Her true net income is a little tricky to work out. As you know, self-employed individuals have a lot of deductions they can take advantage of so I suspect her actual net income is higher with the extra cash payments which I know at least some is not recorded.

Maybe this plan could work if just selling the home in northern CA leaving her with about $800K investible and rental income from her primary which would be the largest source of capital gains tax anyway since she bought it in the 90s whereas the northern CA one was around 2009.

RexualChocolate

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Re: Mother needs retirement help
« Reply #6 on: May 12, 2015, 11:39:02 AM »
I definitely get dealing with fear and ignorance of the stock market; my parents have similar hang ups.

Depending on what kind of person your mother is, you can send her over to bogleheads.org for some reading.

The numbers can also be eye opening. This asset is returning 5.4% gross a year or 33.6k. If you subtract out costs, its likely negative. The only thing going for it is if its long held and the CA tax rate is suppressed due to their especially interesting tax code.

Finally, I finally decided it was not my problem. You can't change other people. You can give them supporting information but that's about it- in the end it is her money. In my case, they eventually came around (mostly, they still have an FA)

aj_yooper

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Re: Mother needs retirement help
« Reply #7 on: May 12, 2015, 12:04:47 PM »
I get the long term capital gains tax hit.  However, if she is in a 25% marginal tax rate now, my understanding is that the capital gains rate is 15%, less than her current tax rate.  If she managed to put herself in a 15% marginal tax rate, the long term capital gains rate is 0.  See:  http://www.bankrate.com/finance/taxes/capital-gains-tax-rates-1.aspx and: http://www.moneycrashers.com/irs-capital-gains-losses-tax-rates-deductions/  and on real estate exchanges: http://www.investopedia.com/articles/06/section1031exchange.asp

The advice to sell the properties is based on the poor returns of the rental and the multiple levels of the residence.  If your mom has a strong desire and talent to be a landlord, she could sell the rental and transfer the money, tax free, to another better performing rental asset, and maybe live in one of the units. 

I think the solution is to look at her current income stream and compare that to current expenses and projected income and expenses in partial or full retirement.  She could find an independent fee for service financial adviser who has her fiduciary interest (CFP) and see what is recommended.   

I suspect the current asset mix will not lead to a happy and sustainable retirement, if that is the plan.

frugaldrummer

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Re: Mother needs retirement help
« Reply #8 on: May 12, 2015, 06:35:14 PM »
Quote
The advice to sell the properties is based on the poor returns of the rental and the multiple levels of the residence.  If your mom has a strong desire and talent to be a landlord, she could sell the rental and transfer the money, tax free, to another better performing rental asset, and maybe live in one of the units. 

Agree with this.  You would not go out and buy a $700k single family home as a rental property investment today, so why keep one as a rental investment? Don't forget the very real costs of maintenance and vacancies too when calculating return.

I can understand her not wanting to have all her money in stocks, but a mix of investments would probably be better overall.  So why not trade her Northern California rental for a more profitable rental, sell her current home and downsize to a single story home, put the rest of the profit from the sale of her residence into stocks?  Or, if she's just really wedded to the idea of rental income, sell both homes, buy a small place to live in, and buy a million dollar apartment building with the rest.  Sounds to me like she will be in good shape whichever way she chooses, though, since she has reasonable assets and will have social security.  Plus she would likely be able to work part time in retirement if she so desired?