Author Topic: Parent wants to retire - help run the math  (Read 4960 times)

Daisyedwards800

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Parent wants to retire - help run the math
« on: April 22, 2016, 11:28:59 AM »
Okay, so my mom has never been Mustachian but getting older and is exhausted and wants to retire.  She is almost 70 years old, but an extremely healthy and young 70, and her total Social Security income is $2300 a month. Right now, she makes $72,000 a year, so the Social Security is taxed and ends up being around $1700 a month. So after pre-tax health and 401k contributions she collects about $3800 a month plus $1700 =$5500 a month.

She has $140,000 in savings in her 401k (essentially it will be tax-free withdrawals if she retires because she would make so little, it would require her to take out more than $8000 a year for her to start feeling a tax hit on that, according to my ballpark numbers). She also has a pension that she will take in a lump sum of $40,000. She did not start working until my father died from cancer, so she doesn't have much of a pension. Her SS and his SS are about the same, since he worked about 25 years and she has worked about 21 years.

So she will have $180,000 in savings. Her mortgage will be paid off soon (Right now the payment is about $850 a month) and her house is worth between $525,000-700,000 (the estimates around our area differ wildly). If she sells she will owe taxes above a profit of $250,000. She has put work into the house but I doubt she has all the receipts of improvements. They paid about $30k for the house back in the 60s.

Bills:
Property taxes: $8300 per year if you include her income exemption
Homeowners insurance: $390 a month (this includes an absurd premium for "wind" since she lives near the water). We are not sure if she can get this down once her mortgage is paid off (almost there!)
Electric: no more than $100 per month
Heat: $200 a month approximate (oil) if you avg the winter out through the year
Water/Gas: $50-100
Car insurance (She has one car for the landfill trips and one car for gas mileage): $160 a month (It's because it's a high cost insurance state)
Car payments: $0
Credit card debt: $0
Mortgage: $0
Food: $200-350 a month
Fun Retirement expenses: ??
Health expenses: She has Medicare, not sure what to budget here
Cell: $100
Cable/Internet: $190 (I don't think I could convince her to get rid of this ) and there is only one company in the area. But I keep trying to and if we really figure out the Netflix/Apple TV thing it could work.

She's recently done work to the house and it's all paid for, she won't need a new roof or boiler or anything major for many years so not looking at huge expenses here.

We've figured to rent or own a condo or something in the same area would cost at least $1000 in maintenance costs a month and average around $300-400k for a 2 bedroom condo, and she really does love living in her house of almost 50 years. So, I think she can afford to stay in her house if she uses her 401k for the taxes each year and maybe works part-time or rents her house out part of the year (it's a very sought after area for summer folks).

Not sure if we are being overly optimistic. She has 2 children who can help out in real emergencies.

What i have told her to do for now is see if she can live on just her wage income and see how it feels and save the entire Social Security. When the mortgage drops off, and she starts using her 401k withdrawals (required minimum distributions) for the property taxes, the rest of her bills will be about what her Social Security is each month. She won't have much but she will be able to retire.

Am I missing anything important? I know health costs can add up, but at this point waiting 5 more years to retire won't make much of a difference in that part.

dandarc

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Re: Parent wants to retire - help run the math
« Reply #1 on: April 22, 2016, 11:38:23 AM »
Gonna be tight as you've noted, but lots of people get by on less.  Just keep the sell the house and rent something cheap option in mind if it starts to look like it isn't going to work out long-term.

The plus side is, once the day-job is gone, there won't be nearly as much income tax to pay, so she might pick up a few hundred per month there.

Daisyedwards800

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Re: Parent wants to retire - help run the math
« Reply #2 on: April 22, 2016, 11:40:22 AM »
Gonna be tight as you've noted, but lots of people get by on less.  Just keep the sell the house and rent something cheap option in mind if it starts to look like it isn't going to work out long-term.

The plus side is, once the day-job is gone, there won't be nearly as much income tax to pay, so she might pick up a few hundred per month there.

You mean she may get credits back?  Let's say her total monthly income is $2300 of Social Security. Is it possible for her to get more than that based on a tax credits?

dandarc

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Re: Parent wants to retire - help run the math
« Reply #3 on: April 22, 2016, 11:42:16 AM »
Oh - and the big thing I'm seeing that you left out is home maintenance.  That's most definitely a significant cost, even if the house is currently in perfect condition.

dandarc

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Re: Parent wants to retire - help run the math
« Reply #4 on: April 22, 2016, 11:43:05 AM »
Gonna be tight as you've noted, but lots of people get by on less.  Just keep the sell the house and rent something cheap option in mind if it starts to look like it isn't going to work out long-term.

The plus side is, once the day-job is gone, there won't be nearly as much income tax to pay, so she might pick up a few hundred per month there.

You mean she may get credits back?  Let's say her total monthly income is $2300 of Social Security. Is it possible for her to get more than that based on a tax credits?

Maybe, but unlikely.  I meant that $1700 take home from social security will be closer to the $2300 gross than it currently is.

Axecleaver

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Re: Parent wants to retire - help run the math
« Reply #5 on: April 22, 2016, 01:14:47 PM »
The insurance costs stick out to me - you should get some new bids from different companies for both the cars and the house. She's paying about 2-2.5x nominal for a house worth 600k. (Maybe that's the "wind tax?") You may want to review the assumptions if it's been a while. For the cars, make sure the landfill beater doesn't carry collision, unless it's a fancy garbage hauler. You're probably paying an age premium as older folks tend to get in more accidents.

I'd recommend going over her budget carefully, you're probably leaving out some expenses you hadn't considered. She's been living on $5500 a month for a while, is she really ready to cut back to ~$2300?

Missing expenses: Medicare gap coverage (covers the "donut hole"), home maintenance, personal maintenance (hair, nails, etc), clothing allowance, travel budget, pharmacy/meds (some can be very pricey under Medicare), charitable giving.

What happens when she needs daily assistance, will she come live with you or a sibling? Nursing home? At that point you could liquidate the house and use that to give her a very comfortable existence. You may only need to plan for this budget to last 12-15 years. So, the 180k could be used at a higher rate than typical (say, 7%) to augment her SS, with the understanding that it is likely to fail at some point, at which time you sell the house.

Daisyedwards800

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Re: Parent wants to retire - help run the math
« Reply #6 on: April 22, 2016, 01:20:10 PM »
The insurance costs stick out to me - you should get some new bids from different companies for both the cars and the house. She's paying about 2-2.5x nominal for a house worth 600k. (Maybe that's the "wind tax?") You may want to review the assumptions if it's been a while. For the cars, make sure the landfill beater doesn't carry collision, unless it's a fancy garbage hauler. You're probably paying an age premium as older folks tend to get in more accidents.

I'd recommend going over her budget carefully, you're probably leaving out some expenses you hadn't considered. She's been living on $5500 a month for a while, is she really ready to cut back to ~$2300?

Missing expenses: Medicare gap coverage (covers the "donut hole"), home maintenance, personal maintenance (hair, nails, etc), clothing allowance, travel budget, pharmacy/meds (some can be very pricey under Medicare), charitable giving.

What happens when she needs daily assistance, will she come live with you or a sibling? Nursing home? At that point you could liquidate the house and use that to give her a very comfortable existence. You may only need to plan for this budget to last 12-15 years. So, the 180k could be used at a higher rate than typical (say, 7%) to augment her SS, with the understanding that it is likely to fail at some point, at which time you sell the house.

Yes, I'm figuring that 10-15 years, the house might be too much upkeep for her, so she'll want to sell it anyway and move to either a retirement community or with us.  THe personal maintenance thing is a big one, you're right.  She dyes her hair (she looks in her 40s!) and she does do some other stuff.  Clothing too.  Have to look into the costs of her medication under Medicare.

Will do some more research on those.  With the $5500 income, she is paying $800 a month property taxes (this is without the exemption because she makes too much now for it, and won't after retirement), and then the $850 mortgage.  So take off $1650 off the $5500 and you get $3850.  She's been living on $3850 pretty comfortably.  Going down to $2300 might be a stretch. 

Axecleaver

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Re: Parent wants to retire - help run the math
« Reply #7 on: April 22, 2016, 01:57:05 PM »
Well, keeping her at $3850/month would require withdrawals of $18,600 a year - or about 10% of her stash per year to augment SS. No good. But if she could get by on half of that, or 9,300 a year in withdrawals, plus SS, that's a 5% WR and requires finding just $725 a month in savings. That is pretty sustainable, and if it runs out, you implement the house sale plan or an income replacement plan between you and the siblings.