Older couple, minimal savings, windfall - How to invest for retirement???

[mmmfox]

Here is the situation my parents find themselves in:

Father: 62 years old
Mother: 60 years old

Both employed, earning a combined income of ~$100,000/year.

Savings: $100,000

Home equity: $250,000

Home debt remaining: $50,000

They've gotten a really late start on saving for retirement, but in the last year and a half have paid off $50,000 in consumer debt and, due to a couple windfalls, find themselves with about $100,000 in savings.

They're likely going to be moving for work within the next 6 months. (They work together. Income will remain approximately the same as it is now.) They don't anticipate that the place to which they will be moving will be the place they live in retirement, but they could end up living there for the rest of their working years; for the next 7 years or so, say.

They're faced with trying to figure out whether they should rent or buy when they make the move, and how to best manage their money and income to put them in a good financial place 7 years from now.

If they rent, so their thinking goes, they could take the $250k in equity, invest it in equities/bonds, and reap whatever gains they can get over the next 7 years, before moving again, cashing out, and buying a home at that time. (Or they don't rent, buy at the next location, sell in 7 years, and buy again.)

Obviously the buy vs rent question involves looking at many (local) variables, but assuming they go that route, how should a couple nearing retirement with $350,000 to invest invest their money to maximize returns but protect against the inherent risk involved with investing that kind of money all at once and with the limited retirement time horizon they're working with?

If they had 10, 20, 30 years to work with I'd suggest they go the standard MMM, Bogleheads, FIRE route. But with just 7 years ahead of them, I wonder what I might be overlooking in terms of minimizing risk.

What does everyone think about a) the rent vs buy question (acknowledging not many details shared above) and b) how they should think about investing getting started so late in the game?

I'm inclined to suggest they do rent for the duration of the next 7 years after their move for work to avoid the costs associated with buying and owning a home and to be able to leverage the equity in their home as index fund investment capital, sticking it all in a Vanguard Target-Date Retirement Fund (utilizing IRAs to the degree possible). But I'd love to hear some other perspectives and advice.

Many thanks in advance to any Mustachian that can offer their help and insights. Thank you.

[Another Reader]

Do they qualify for Social Security and have they calculated how much they will get?  Social Security could provide a significant part of their retirement income if they qualify.

[mmmfox]

Do they qualify for Social Security and have they calculated how much they will get? Social Security could provide a significant part of their retirement income if they qualify.

Yes. They both qualify for Social Security. They've confirmed a combined monthly pre-tax SS income of around $4k/mo.

[frugal_c]

I would have to see the numbers but if prices are reasonable as compared to rents then I would be tempted to buy.  I can remember a time period where housing prices shot up almost 100% and equities were down 50% (2000-2009).  For this reason I am not comfortable without owning something.  However, there are definitely risks either way and they could get trapped there.

Ideally you buy just enough home, as far as space and price, if it will be a shorter duration purchase.  This will reduce expenses and if prices go down they would hopefully have less to lose.

Just my opinion.

[Laura33]

If they had 10, 20, 30 years to work with I'd suggest they go the standard MMM, Bogleheads, FIRE route. But with just 7 years ahead of them, I wonder what I might be overlooking in terms of minimizing risk.

FWIW, this is exactly backwards:  the fewer years you have until retirement, the more the MMM/FIRE attitude is critical.  Standard investment plans rely on the power of compounding, because you have 4-5 decades for your money to work for you.  OTOH, if you want to FIRE, you need to focus much more intensely on minimizing your spending and maximizing savings, because you have fewer years for compounding to work its magic.  See https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ for an illustration.

I think the question of buy vs. rent is the tail wagging the dog.  Over a 7-yr timeframe, they have a reasonable chance of making money either in RE or in the market, but the timeframe is also short enough that they could experience a good-sized dip and not have time to recover.  The real question is will they be able to afford to retire in 7 years at all?  Do they know what their SS payouts will be?  Do they know how much they are currently spending, or how much Medicare is going to cost them?  Where do they plan to live long-term, and what is the cost of living, how much does housing cost there, etc.?  Do they have any life insurance or LTC insurance?  Note also that they have 2 SS for now, but they will drop down to one SS when the first spouse dies, so they need to plan for that. 

I would recommend that by the time they retire, they have (1) a paid-off house; (2) an emergency/sinking fund to cover unexpected costs, like a new roof, new car/major car repairs, etc.; and 25x their annual spending needs (after SS) invested.  If they can get there within the next 7 years, great!  If not, they will need to rethink things -- would they rather have a cheaper house, or lower their expenses, or work longer? 

Assuming their numbers are on target, I would recommend targeting an end goal of a few years' expenses in individual bonds or CDs, and then keeping the rest of the money in a broad market index -- if you keep some of the $ in cash, they can afford to ride out market downturns.  The most efficient way to get there is for now, put the windfall money and all of their monthly investments into the market.  Then, when they're a few years away from the target, divert their new investments into CDs or individual bonds, so that by the time they pull the plug, they have the cash 'stache they need.

Note that I haven't addressed the "buy a house or put the $250K into the market" question.  That's because IMO, the housing decision over the next 7 years should be driven by (i) what they can afford, and (ii) the lifestyle they want.  If they aren't on track to retire in 7 years and they need to cut expenses, then perhaps they should rent a cheaper apartment for the interim to help them build up their asset base.  If their retirement plan won't allow them to afford a $250K house, there's not much point in locking that much up in a house now with the idea of rolling it over into their permanent home. 

[RWD]

I would lean towards renting, though ~7 years is right around the usual threshold for switching from renting to buying. Renting greatly simplifies things when it's time to move. Simple is going to be very welcome when it comes time for a 67 and 69 year old to move. Of course, the numbers will vary by location so if buying looks much better then there's nothing wrong with going that route.

Also, I agree with @Laura33 above. Overall financial picture should be the priority.

[mmmfox]

Thank you, Laura33, frugal_c, and RWD for your feedback. Very helpful.

[mmmfox]

If they had 10, 20, 30 years to work with I'd suggest they go the standard MMM, Bogleheads, FIRE route. But with just 7 years ahead of them, I wonder what I might be overlooking in terms of minimizing risk.

Assuming their numbers are on target, I would recommend targeting an end goal of a few years' expenses in individual bonds or CDs, and then keeping the rest of the money in a broad market index

This is essentially all I meant with my quote above. That is, with the limited time horizon, what would be the best method to mitigate the risk of the stock or housing markets falling out right as you approach retirement. Of course, a diversisfied portfolio with a lower percentage of equities is part of that. But as you added, pulling out a few years of expenses and sticking it into a CD, say, could be a good strategy, too. Thanks for that.

[Shane]

Owning a small piece of 4K+ businesses (VTSAX/VTI) seems a lot safer to me than owning a particular house, in a particular neighborhood, in a particular state, in a particular country. If the real estate market crashes, and your parents can't sell their house for anywhere near what they paid for it, and they don't want to stay where they are, they'll be screwed. If they put their $350K into a combination of VTI/BND and, worse case scenario, the stock/bond markets are down in 7 years, they'll still be able to walk away from their rental and move somewhere else, living off of their $4K/mo SS benefits while they wait for the markets to recover. If your parents could buy a home for a small percentage of their net worth, it might make sense for them to do that, instead of renting, but if they're going to have to put basically all of their savings ($350K) into a house, that sounds way too risky to me, especially since they don't want to stay in the place they're going to be working for the next 7 years after they retire.

[mmmfox]

Owning a small piece of 4K+ businesses (VTSAX/VTI) seems a lot safer to me than owning a particular house, in a particular neighborhood, in a particular state, in a particular country. If the real estate market crashes, and your parents can't sell their house for anywhere near what they paid for it, and they don't want to stay where they are, they'll be screwed. If they put their $350K into a combination of VTI/BND and, worse case scenario, the stock/bond markets are down in 7 years, they'll still be able to walk away from their rental and move somewhere else, living off of their $4K/mo SS benefits while they wait for the markets to recover. If your parents could buy a home for a small percentage of their net worth, it might make sense for them to do that, instead of renting, but if they're going to have to put basically all of their savings ($350K) into a house, that sounds way too risky to me, especially since they don't want to stay in the place they're going to be working for the next 7 years after they retire.

Thank you for your thoughts, Shane. Very helpful.

[Bernard]

I'm 62, my wife 57-1/2. We too started way too late saving for retirement. Thus, I plan on working 'til 70. May the Force protect me.

The wife and I will together will get about $3,500 in 2027 when I'm 70, and she is 65-1/2. That should be sufficient for us to live on if we need to (I did my calculations), as long as we do not have a mortgage or rent to pay. So no housing cost is essential. (If all hell were to break loose, we could still retire abroad and live on much less than that.)

Since -- and that is paramount for my answer to you -- your parents do not plan on retiring in that new location, I would suggest for them to rent if that's possible, and put the money they get from the home sale into the market. Capital gains from real estate are free up to $250K, so there's no additional tax burden for them to consider. Sure, there's a chance that the market will drop during that 7 years, but with $4K in SS benefits, they should still be able to manage 'til things look better. With a bit of luck, their $350K should grow to a larger sum, and that will provide an additional financial bolster. At the time of retirement, they should do what I plan on doing: buy a cute little home or condo where they wish to spend their golden years.

[John Galt incarnate!]

I'm 62, my wife 57-1/2. We too started way too late saving for retirement. Thus, I plan on working 'til 70. May the Force protect me.

The wife and I will together will get about $3,500 in 2027 when I'm 70, and she is 65-1/2. That should be sufficient for us to live on if we need to (I did my calculations), as long as we do not have a mortgage or rent to pay. So no housing cost is essential. (If all hell were to break loose, we could still retire abroad and live on much less than that.)

Since -- and that is paramount for my answer to you -- your parents do not plan on retiring in that new location, I would suggest for them to rent if that's possible, and put the money they get from the home sale into the market. Capital gains from real estate are free up to $250K, so there's no additional tax burden for them to consider. Sure, there's a chance that the market will drop during that 7 years, but with $4K in SS benefits, they should still be able to manage 'til things look better. With a bit of luck, their $350K should grow to a larger sum, and that will provide an additional financial bolster. At the time of retirement, they should do what I plan on doing: buy a cute little home or condo where they wish to spend their golden years.

A couple  is eligible for up to a $500,000 capital gains exclusion when they sell their  home  if  the sale satisfies   all IRS requirements (which are pretty simple).

[MrThatsDifferent]

Ok, I’m not the best with this stuff, but this would be my thinking:
1. They sell their place, get the $250k, add the $100k and then buy a Vanguard fund and don’t touch for 10 years—that should double to $700k
2. They rent for 10 years, reduce expenses and add some money to Vanguard account and also save some for emergency
3. They use their cash savings to live off after the retire in 7 years until the 10 year mark
4. With SS at $48k and their invested money generating $28k, they’ll have around $76k to spend from 10 years onwards at least

They seem like they’re in a good spot to me. They’ll just need to sort healthcare, estate planning, and long term care if needed.

[Laura33]

The only other thing I'd add is to remember that it is likely that one SS check will go away, leaving the survivor to get by on one check, possibly for several years.  So yes, if they can keep their expenses down to what two SS checks will cover, that's awesome -- but they still need an investment kitty to cover any gaps after the first one passes.

[wageslave23]

Another option is to buy a house but use financing.  They can still invest their home equity minus the 20% downpayment.  I would be focused on reducing my housing costs as much as possible.  If that is buying a house or renting, so be it.  In general, buying should be cheaper than renting, all else being equal because the landlord wouldn't have any incentive to invest in a rental property otherwise.  Obviously some markets are out of whack and this isn't the case.  The problem is most people compare the cost of renting an 800 sq ft apartment vs owning an 1800 sq. ft. house.

[mmmfox]

Thanks for all the perspectives and advice, everyone. Any additional thoughts and opinions are appreciated.

My parents are leaning toward selling their house (whether they move or not), downsizing and renting a smaller place, and investing as much as they can (including whatever they get for their house plus the recent windfall) in a Vanguard Target Retirement Date fund.

[Cassie]

Renting is the smart option. Laura has good ideas and they aren’t in that bad of shape.

[mmmfox]

Update: My parents carried through with selling their house. They moved to the new town and are now renting. They're sitting on ~$300k, nearly all of their life savings, and are ready to deploy it in some manner.

Since I posted the the original forum message and question, COVID19 has struck and markets have become much more volatile. Prior to the pandemic, the plan was to put most of their cash into a Vanguard Target Date Retirement fund the moment their house was sold. Now they're reluctant to put all of their money into the market right at this time, with the expectation that the market may drop considerably in coming months. Of course, no one knows what the future holds and how the market will react, but it seems at least plausible that shutting down the world economy to the degree that we have and are likely to continue to do will result in some kind of recession or depression and that the market will reflect that.

In any case, what would you do if you were in this situation? Put it all (minus emergency funds) in the market now; this might be the bottom, no one knows and we can't time the market? Wait and see what happens; we likely haven't seen the bottom? Or dollar cost average over a period of months/years? Or something else?

Thanks in advance for any new insights and feedback.

[Jack0Life]

Update: My parents carried through with selling their house. They moved to the new town and are now renting. They're sitting on ~$300k, nearly all of their life savings, and are ready to deploy it in some manner.

Since I posted the the original forum message and question, COVID19 has struck and markets have become much more volatile. Prior to the pandemic, the plan was to put most of their cash into a Vanguard Target Date Retirement fund the moment their house was sold. Now they're reluctant to put all of their money into the market right at this time, with the expectation that the market may drop considerably in coming months. Of course, no one knows what the future holds and how the market will react, but it seems at least plausible that shutting down the world economy to the degree that we have and are likely to continue to do will result in some kind of recession or depression and that the market will reflect that.

In any case, what would you do if you were in this situation? Put it all (minus emergency funds) in the market now; this might be the bottom, no one knows and we can't time the market? Wait and see what happens; we likely haven't seen the bottom? Or dollar cost average over a period of months/years? Or something else?

Thanks in advance for any new insights and feedback.

I would put everything in the market except for 3-6 months of living expenses.
There no better time to dump money in the market than right now. You're getting a 20% discount right now.
Sure it may bottom out some more or it may not but you know if you put the money in now, in a year it will grow when the economy is back to speed.
$200k could be $250K in a year or two. Thats huge with the limited amount of money that they have.

[Shane]

It depends on what your parents' needs are from the stash. How much of the $300K, if anything, do they need to withdraw each month to pay their living expenses?

[Laura33]

They need to figure out an asset allocation they can live with long-term, and then deploy their money into that now.  I'd argue the market is "safer" now than it was just a few months ago: prices and valuations had been high for quite some time, so a drop was inevitable; now that we've had that pending drop, you can buy the same assets at a much more reasonable price.  However, all the math in the world won't help if your parents are freaked out and will sell out if thing drop further.

So:  what do your parents need to do to feel safe?  Some amount in cash?  Bonds?  Just put everything into a target-date fund?

[former player]

I know common wisdom here is "no market timing" but in this case your big emphasis to them should be on how well they have already done on market timing by selling their house at pre-virus prices and not investing until they got post-virus prices.

Given that they are nervous, I would ask them how long they think it will be before the economy recovers, subtract from the $300k whatever they want in liquid assets and propose investing the remainder divided by the months they think it will be until recovery.