Trying to Help My Parents Retire

[philsfinance]

A little background before I get into the numbers. I've been interested in personal finance for my entire life - after growing up in a family where everything was 'always tight.' My father is 67 and wants to retire at 70. They approached me to share their current situation and get my advice. I have a few ideas for what I think they should do, but I know this awesome community might be able to shed some different light on the situation. So here it goes....

ps. I realize I don't have all of the information you want - but here is most of what I know.

Assets
House 1 - $725,000
House 2 - $425,000
401k - $1,100,000
Pension will be about $500/month in retirement
Social security will be about $3,500/month in retirement

Liabilities
Credit Card & Loan Debt - $59,000
(this includes 15+ different credit cards/personal loans that range from 10-29%)
Mortgage on House 1 - $256,000
Mortgage on House 2 - $244,000

Monthly Take Home Pay
$7,000 - salary
$1,500 - rent from House 2

Monthly Expenses
$2,080 - Mortgage on House 1
$2,150 - Mortgage on House 2
$700 - Grocery
$900 - Utilities
$1800 - Credit card debt minimum payment
~ $1,000 for everything else - gas, vacations, gifts, restaurants, house, car maintenance, pets, personal

Retirement Income Estimation
I estimate that their retirement income will be ~ $5,000/month with their pension, social security and using the 3% rule for his 401k. I was being conservative with that because my mom is only 54 years old. Am I completely wrong here?

My General Estimates & Initial Thoughts
Their monthly expenses are ~ $6,500 without credit card payments. So obviously their current expenses/living style doesn't match up with what they will have in retirement. I know there is a lot they can cut out (vacation, restaurants, cheaper internet, cut cable/netflix) etc. They've addicted to buying things and trying to keep up with the Joneses.

Moving Forward
They have a few options for moving forward -

1) Inheritance: They may be receiving ~$80,000 inheritance in the next year from the death of my grandfather. While I don't believe this is guaranteed, they are hoping for it. This could be used to pay off the credit card debt.

2) Sell one or both houses: To pay off the debt and even be mortgage free, they could sell House 1 and move into House 2, or sell both houses and move to a new house that's completely paid for. They would also pay off their credit card debt with the sale of these houses.

3) Get their shit together now before they retire: By cutting some expenses and increasing their monthly payment towards their credit card debt from $1,800 to $3,000 - I estimate they could pay off their credit card debt in the next 2-3 years. Then, they could use the potential inheritance & selling one or both houses to truly set themselves up in retirement without any debt or mortgage.

Last Thoughts from the Parents

My father is hesitant to sell one or both houses. He sees them as assets that 1) bring in rental income, and 2) could be sold at a later date if necessary. My mother wants to sell House 1 and move into House 2.

I tried to explain to them that having both houses would be great in retirement, but the fact is that  their mortgage payments are too high, and their expected income in retirement is too low to keep them both.

Am I wrong here?
Am I missing something?
What would you do?

Thanks in advance!

[MoneyizHere]

This is an interesting case - because assets seem like they're really good and all set for retirement.  Then the liabilities make my stomach turn. 
You've got a good plan - but your mom has the best plan. 

They could retire today if they take the steps: (ask your dad why he really wants to work more?  so he could keep incurring debt/paying debt and being a slave to his debt?)
1.  Put house #1 up for sale
2.  Kick tenant out and move into House #2 (offer tenant $1500 to move out) - tenant will gladly accept and move out
3.  Kill the mortgage on House #2 and kill the CC debt.
4.  Start the pension $500/month
5.  Reduce that utility bill so that all the necessities are paid with the $500/month budget (Grocery/Utility) - cut the cable and internet, switch cell phone carriers to allow for unlimited data and use free mobile hot-spot for their internet.   
6.  Live off the remaining house proceeds until your dad turns age 70, start withdrawing 401k upon retirement and rollover to ROTH to whichever tax bracket they want to.
7.  Take SS at age 70
8.  Be aware of RMDs for the 401k once past age 70 - but they also have SS to pay their tax bills for ROTH Conversions.

Do not depend on the death of a loved one to bail you out - you may find out that they had a ton of debt as well...If you do get an inheritance - use it to convert your 401k to ROTH. 

[MDM]

ps. I realize I don't have all of the information you want - but here is most of what I know.
...
What would you do?

First, get all the information. 

E.g., see How To: Write a "Case Study" Topic and the links therein for a good outline you could follow.  $1000/mo is high for "miscellaneous" if they need to get serious about reduced spending.

See also Investment Order for some thoughts about that CC debt, etc.

On the bright side, a 3% withdrawal ratio is likely overly conservative.  There will always be those who say "but what if...?" and replace the ellipsis with all sorts of Fear, Uncertainty, and Doubt.  See Safe withdrawal rates - Bogleheads and Stop worrying about the 4% rule for more.

[dandarc]

$500 pension
$3500 SS
$2750 3% of 1.1 million
$1500 rent (if you're going to count the mortgage as an expense, the rent is clearly income)

=

$8,250 / month coming in. Where are you getting $5,000?

They should sell at least one house - House #2 isn't likely a very good investment unless it is in a place where you'd expect very good appreciation.

As others have mentioned, you need all of the information, but at first glance, I kind of like your mom's downsize into the rental plan, provided the proceeds of selling House #1 are used to pay off the credit card debt and then invest the rest or at least pay off the house they're keeping.

[marty998]

Probably not too controversial to say it is unlikely a 67 year old will implement wholesale changes to their lifestyle overnight. That's a lot of years of well ingrained habits to change in a short period - even your 54 year old mother might fit into that bracket.

Take it one step at a time, start with the credit card emergency. I would hate for them to spend the entire inheritance paying off credit card debt, only to find a year later they have racked up another $59,000 in credit card debt.

They need to change their spending habits first to ensure any progress is not swept away by continued poor financial choices.

[bacchi]

^^^ What marty wrote. Utilities are $900. Are the running the AC with the windows open? And groceries at $700? That's high for 2 people.

You can go higher than a 3% WR. Go crazy and set it to 3.5%.

[actonyourown]

A little background before I get into the numbers. I've been interested in personal finance for my entire life - after growing up in a family where everything was 'always tight.' My father is 67 and wants to retire at 70. They approached me to share their current situation and get my advice. I have a few ideas for what I think they should do, but I know this awesome community might be able to shed some different light on the situation. So here it goes....

ps. I realize I don't have all of the information you want - but here is most of what I know.

Assets
House 1 - $725,000
House 2 - $425,000
401k - $1,100,000
Pension will be about $500/month in retirement
Social security will be about $3,500/month in retirement

Liabilities
Credit Card & Loan Debt - $59,000
(this includes 15+ different credit cards/personal loans that range from 10-29%)
Mortgage on House 1 - $256,000
Mortgage on House 2 - $244,000

Monthly Take Home Pay
$7,000 - salary
$1,500 - rent from House 2

Monthly Expenses
$2,080 - Mortgage on House 1
$2,150 - Mortgage on House 2
$700 - Grocery
$900 - Utilities
$1800 - Credit card debt minimum payment
~ $1,000 for everything else - gas, vacations, gifts, restaurants, house, car maintenance, pets, personal

Retirement Income Estimation
I estimate that their retirement income will be ~ $5,000/month with their pension, social security and using the 3% rule for his 401k. I was being conservative with that because my mom is only 54 years old. Am I completely wrong here?

My General Estimates & Initial Thoughts
Their monthly expenses are ~ $6,500 without credit card payments. So obviously their current expenses/living style doesn't match up with what they will have in retirement. I know there is a lot they can cut out (vacation, restaurants, cheaper internet, cut cable/netflix) etc. They've addicted to buying things and trying to keep up with the Joneses.

Moving Forward
They have a few options for moving forward -

1) Inheritance: They may be receiving ~$80,000 inheritance in the next year from the death of my grandfather. While I don't believe this is guaranteed, they are hoping for it. This could be used to pay off the credit card debt.

2) Sell one or both houses: To pay off the debt and even be mortgage free, they could sell House 1 and move into House 2, or sell both houses and move to a new house that's completely paid for. They would also pay off their credit card debt with the sale of these houses.

3) Get their shit together now before they retire: By cutting some expenses and increasing their monthly payment towards their credit card debt from $1,800 to $3,000 - I estimate they could pay off their credit card debt in the next 2-3 years. Then, they could use the potential inheritance & selling one or both houses to truly set themselves up in retirement without any debt or mortgage.

Last Thoughts from the Parents

My father is hesitant to sell one or both houses. He sees them as assets that 1) bring in rental income, and 2) could be sold at a later date if necessary. My mother wants to sell House 1 and move into House 2.

I tried to explain to them that having both houses would be great in retirement, but the fact is that  their mortgage payments are too high, and their expected income in retirement is too low to keep them both.

Am I wrong here?
Am I missing something?
What would you do?

Thanks in advance!

Do they pay the utilities on the second house with a renter?  If so, that might explain the huge bills.

Like others said, if you estimate their retirement income with a 3.5% withdrawal rate, I get that they will have $8,708.33 in retirement income per month.  That covers all their current expenses, so they are ok on earnings but far from optimized and not considering any taxes to pay they might still be short.  They need to get rid of credit card debt and one mortgage to be financially fit along with reducing expenses.

[former player]

Even without changing spending habits your father will be fine: he can spend down capital over the rest of his probable life span and likely not run out. The problem is your 54 year old mother, who is both 13 years younger and statistically likely to live longer.  So I'd attack the problem from that angle: what does your mother think she needs in order to have a comfortable life if she survives your father, and what does your father think he needs to do to leave his wife in a comfortable position if she survives him.

[philsfinance]

Thanks for checking my math... and I appreciate everyones ideas.

I was roughly estimating $5,000 as post-tax income (after state, federal, property taxes). They live in CA - so expensive.

I left House 2 rent out of the picture because it's likely they'll sell this, and I didn't want the rental income to mess up their expectations.

I lumped their car insurance/registration payment into utilities. That's why it's $900/month. But yes, super high. Definitely can find ways to decrease that.

Thanks again for the thoughts!