Helping My 50+ Year Old Parents Prepare for Retirement - Any Advice?

[kshforFI]

Recently I've taken on the effort of trying to help my parents save for retirement, who have a very traditional mindset and not much knowledge about investing. I've been doing a lot of research on how I can save on my own, but helping someone save in their 50s is a whole different picture and a bit overwhelming.

After taking stock of their situation, here's what I found out: 

• Dad is 59, mom is 57.
• Savings of about 15k. Around a third of that is in a business checking account, which may or may not be pulled out.
• They currently paying off a house, with a mortgage of about 220k left. No other debts.
• Dad earns around 55k a year (he also owns a small contractor business painting homes - this is the total income with both the business and a job). Mom is a homemaker.

I'm realistic about their situation - my parents will never fit the typical Mustachian model, but they're open to saving and investing, which I hope will encourage them to make this a priority. I'd like to make the most of the time that they have left before they hit their mid-60s. I've convinced them that they should start a ROTH IRA and start putting in their $6500/year contributions - I'm thinking a 50/50 split in stocks and bonds. If anyone in this community has any thoughts, suggestions or feedback, that would be much appreciated. 

[Dee18]

Sounds like the most important thing to do, as lhamo suggested, is determine their future Social Security.  That may open their eyes to the fact that if they continue as they are now--with only one working and an outstanding mortgage of $220,000--they will not be retiring at 65.  Unemployment is so low now that your mother should have no trouble finding a job, but you might help her see what job training/placement services might be available to help with the transition.

[MDM]

With their ages, debt and limited savings they would probably be better off saving into a traditional IRA rather than a Roth -- the tax savings will be quite significant.  They are not going to be in high tax bracket in retirement since they will probably be living  mostly off social security. 

Speaking of which, if they haven't done so already it would be a good idea for them to get your dad's social security earnings record so they can see what their benefits are going to be in retirement.   It would also be good for them to start tracking expenses/living on a budget that will match that income level.  They might be in for a big shock at how much lower SS is going to be than current income, and it sounds like they are just getting by without much to spare.

Without a work history your mom will get a certain amount of SS based on your dad's earning record, but it probably won't be enough to support her if he passes before she does.   She should consider doing at least SOMETHING to earn additional income as long as her health can support it.  If they live near an elementary school providing before-/after-school childcare might be a good option.  Housecleaning or pet services another. 

They also might want to consider downsizing to a more affordable home.  220k in mortgage debt at their ages/limited income level is kind of scary.

They also should plan to avoid taking SS as long as possible to maximize their benefits.

+1 to all that.

Their federal tax rate in retirement will likely be 0%.  E.g., that would apply to $30K/yr SS and $20K/yr withdrawals from a traditional IRA, so a situation with less than both of those amounts would also pay 0%.  If that is their future, any tax saving now would justify using a traditional account instead of Roth.

Note that if they put $4000 into traditional IRAs, it would be better to have each contribute $2000 than for one to contribute $4000.  See Form 8880 to understand why.

Have them go to my Social Security | Social Security Administration if they haven't already to get electronic access.

[kshforFI]

Thank you lhamo, Dee18, and MDM for the great advice. Looking into the differences, it absolutely sounds like a traditional IRA will be best for their situation. The social security calculator is also a great idea, I'm definitely looking into that.

I've recently talked to my dad, and he's committed to contributing to an IRA. The Form 8880 is a tip I didn't know about - it sounds like my next steps are to determine their filing status and see if my mom can open a spousal IRA.

[MDM]

I've recently talked to my dad, and he's committed to contributing to an IRA. The Form 8880 is a tip I didn't know about - it sounds like my next steps are to determine their filing status and see if my mom can open a spousal IRA.

Assuming the filing status is MFJ, gross income is exactly $55K with no 401k or IRA contributions, and your dad has access to a 401k, here's something to consider:
- dad contributes $15K to a 401k
- mom contributes $2K to her tIRA.
If they do that, their federal income tax for the year will be $0 due to the saver's credit.

[kshforFI]

Thanks MDM, that should have been one of the first things I asked my dad... I'll have to see if his company offers a 401k.

[Acastus]

The biggest trick will be convincing them to start saving & investing now, reducing their spending now, so they do not have to reduce income catastrophically when they retire. It sounds like they will carry the mortgage into retirement. Maybe they should downsize now. They should probably start saving 30% of income, but that will be a major hit to their current spending. Could you make that kind of adjustment yourself? Just something to think about.

Are you sure Dad does not have a pension or deferred account, and has just forgotten about it? Essentially no savings and approaching 60 is kind of tough.

They have 8-10 years to save. Whatever they can save will be better than nothing. Hopefully, they can be convinced. Some people cannot make the change. They would rather keep their current lifestyle and worry about the train wreck when it happens. You are their kid, and it is hard to take advice from your kid. I ran into that problem with my parents. You may have better success if you go with them to a financial counselor.