Help my 64yo mom retire!

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Help my 64yo mom retire!

Postby rock_marmot3 » Sat Dec 29, 2012 9:50 pm

Hello Bogleheads! I've been promising to help my mother sort out her finances for a couple years now, and so I'm going to finally try and follow through.

After more than twenty years teaching in the public schools, she is very much tired of working and ready to retire. The goal is to find a way to make that possible as quickly as possible.

But there's a lot of debt to deal with first.

Here's the situation:

Divorced., Age 64.
Tax Rates: 25% Federal / 5% Illinois / Exempt from FICA due to participation in state pension system

Debt: total of $225k
- Home equity loan: $75k @ 4%, paying interest only
- Mortgage: $90k @ 4.875%, on track to pay off in Aug '18
- Student loan: $42k @ 6%, paying mostly just interest
- Credit card: $18k @ 6% paying mostly just interest
All except the credit card are tax-deductible.

Current assets:
Pension:
benefit would pay $40k/year (taxable) if she retired today
benefit increases by about $2k/year for each additional year of work
includes medical coverage
Not eligible for any social security.

Investments: total of $245k
$25k in a Roth IRA
$220k in taxable
both investments are in a sensible, low-cost, diversified portfolio (mostly DFA) held by a professional adviser… who adds a 1.25% fee.

House:
Market value of $375k in its current state, but if it were to go on the market, it would be as a fixer-upper--it's habitable but extremely unfinished, and there is a lot of long-neglected maintenance that the next owner would need to do. I don't know much about these things, but I'd be surprised if it wasn't $80 - $100k worth of work that it needs.

Questions:

(1) How would you set her up to be able to retire? I figure that to continue her current lifestyle, she needs probably $50k per year, for consumption net of savings or debt payments.

(2) I have been telling her for years to pay off the debt and to instead save the money that she's using for her monthly payments. I'm sure that most of the responses here will say the same. But that's been psychologically difficult for her. She has never saved money in her life--she has been buried in debt since her 20's, and has been barely able to earn enough to scrape by. I think she fears that if she didn't have to make monthly payments, she's just spend the extra money. I think she also takes a lot of comfort in having that $200k+ in the bank, "just in case". Any suggestions on how to get her to become comfortable with a debt-free lifestyle?

(3) Should she be looking into long-term care insurance? Where do we look for that? The wiki page isn't super helpful.

(4) Should I be encouraging her to sell the house and moving into somewhere cheaper, maybe even a rental? Property taxes are very high where she lives, the house needs a lot of expensive maintenance work that she's no longer able to perform herself (and I live in another state), and she may well need to take advantage of the cash she'd pocket from selling.

Thanks in advance for your help!

RM3
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Re: Help my 64yo mom retire!

Postby steadyeddy » Sat Dec 29, 2012 10:37 pm

It sounds like she's within striking distance of making retirement work. If she were to liquidate her savings, pay off her debts, and make slight reductions in living expenses she could do it today. Since it sounds like she is hesitant to take those steps, my recommendation is to let her work it out on her own. She will make difficult decisions to achieve her goals if and when she desires.
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Re: Help my 64yo mom retire!

Postby northstar22 » Sat Dec 29, 2012 10:40 pm

I would try and convince her to pay off the credit card and student loans with her savings. Ask her if she would borrow money at 6% interest to invest in taxable. The answer is obviously no. You can't beat a 6% guaranteed return in this market, even with the tax deduction.

Then I would refinance the house. My mom is the same age and just refinanced into a 15 year loan at 3%. And she had a home equity loan as well which was rolled into the refinance. So you combine 2 loans into 1 which is simpler and has a lower interest rate.

There's been a bunch of articles on LTC insurance lately, you could google them. It's very expensive and not for wealthy people or poor people, there's a sweet spot in the middle. Not sure how your moms pension would factor into her eligibility for Medicaid paying for LTC. I decided against it for my parents as my sister and I will end up paying for it if it becomes needed, but that may not work for everyone.
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Re: Help my 64yo mom retire!

Postby Calm Man » Sat Dec 29, 2012 10:59 pm

Your mother has one interesting hurdle to navigate over which she has little control. As you mentioned, she is one of those municipal employees who did not participate in the FICA system. I never understood why a group would do that, but that's water under the bridge. The Illinois Teachers' retirement system (TRS) is seriously underfunded and is unlikely to deliver promised benefits, although your mother might escape drastic cuts at her age. The medical is almost a certainty to be either reduced or eliminated. I would encourage her to work more and pay off those large debts as much as possible prior to retiring. For me to offer something positive, there is no need for her to pay the 1.25% to an advisor to have DFA funds. She can transfer the assets to Vanguard and use index funds and save on the expense ratio difference between Vanguard and DFA as well as that horrendous 1.25% fee. She needs that more than the advisor. Good luck to her.
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Re: Help my 64yo mom retire!

Postby steadyeddy » Sat Dec 29, 2012 11:06 pm

northstar22 wrote:Ask her if she would borrow money at 6% interest to invest in taxable. The answer is obviously no.


Haha! My own mother would have no idea what the hell I was talking about if I asked her that question, and the answer would not seem obvious!
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Re: Help my 64yo mom retire!

Postby therub » Sat Dec 29, 2012 11:25 pm

By my math she has $210k equity in the house - which sounds like it is too big, too expensive, and too much maintenance anyway. Sell it, use the equity to pay off the $60k in student loans and credit cards - leaving $150k plus her other investments.

Find a nice town home or something single level, maintenance free, and use the 150k for a down payment/cash sale. I think it would be very liberating.
Fees are the rub.
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Re: Help my 64yo mom retire!

Postby NYBoglehead » Sat Dec 29, 2012 11:33 pm

Tell her to dump the adviser for starters, that should add 1.25% annually to her returns.

I do not think your mother should retire just yet. If I were in her position I would try to work another 2-3 years to eliminate the student loans and credit card debt at a minimum. I would also advise her to sell the house and by something smaller, cheaper, and with lower property taxes. Using the proceeds from a house too large for your needs can add a nice boost to your portfolio and financial well being.

40k/yr in pension is obviously very nice, but adding 2k more per year of work I think is incentive enough to try to stick around just a bit longer. Two sides to this equation: by working a few more years (or even just 1 more would be very helpful) she's increasing her annual cash flow and SHOULD have less debt to make payments on.
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Re: Help my 64yo mom retire!

Postby Watty » Sun Dec 30, 2012 12:17 am

therub wrote:By my math she has $210k equity in the house - which sounds like it is too big, too expensive, and too much maintenance anyway. Sell it, use the equity to pay off the $60k in student loans and credit cards - leaving $150k plus her other investments.

Find a nice town home or something single level, maintenance free, and use the 150k for a down payment/cash sale. I think it would be very liberating.



+1 on drastically downsizing on the house.

If she does buy some other place though I don't think that having a mortage on her pension is a good idea and she should limit herslef to a place she can afford to pay cash for or just rent.
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Re: Help my 64yo mom retire!

Postby donall » Sun Dec 30, 2012 1:44 am

It sounds like your mom is in the CTPF (Chicago Teachers Pension Fund) since a health insurance subsidy is given. I echo what others have said that mom should work a few more years teaching and also downsize. Her net worth is essentially zero, so she needs to do some last minute saving for retirement. Unfortunately one cannot rely on pension promises, especially in Illinois, so I think she may have to supplement her pension with part-time work such as tutoring. Your mom should also see if she can lower her expenses to match her pension during retirement. If the student loans are hers, then she should investigate if some of her loans can be forgiven. Your mom is lucky that you are helping her.
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Re: Help my 64yo mom retire!

Postby Johm221122 » Sun Dec 30, 2012 2:20 am

How bad does she want to retire?at 64 in the world today,I can imagine teaching kids in the city is extremely difficult. If she can hold on others have given good advice. But if retire is the only solution for her to be happy, sell house,pay debt,collect pension and move as far as she can away to low cost area.She could even just rent a small apartment or rent room.40k plus her investments is more than most.If it was me happiness trumps 2k more a year.As far as investment is she interested in learning some basic information so she can feel comfortable with what she has .In reality she is in good shape if all she wants is simple retirement
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Re: Help my 64yo mom retire!

Postby fatlever » Sun Dec 30, 2012 2:22 am

Sounds so much like my mom. Has $40k in CDs earning 4%. Has 40k in mortgage debt at 7%. But leaves the money in CDs just in case of a rainy day!
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Re: Help my 64yo mom retire!

Postby celia » Sun Dec 30, 2012 6:15 am

rock_marmot3 wrote:Debt: total of $225k
- Home equity loan: $75k @ 4%, paying interest only
- Mortgage: $90k @ 4.875%, on track to pay off in Aug '18
- Student loan: $42k @ 6%, paying mostly just interest
- Credit card: $18k @ 6% paying mostly just interest


If she is paying interest only on the debt, doesn't she know that doing that, means the principal will never be paid off? Does she plan to keep paying this interest until she dies? Or is she interested in paying off the debt? (Only she can answer that.)

However, her history of only paying the minimum (ie, interest only) may make it difficult to change her ways. The other comment about her always having been in debt is worriesome. I wouldn't use her savings to pay off the debt, since I'll bet she just gets back into debt, and then her savings would be gone. She needs to figure out what SHE wants to do.

Does she have any idea what a budget looks like? You could have her estimate what she thinks she spends in each category. Then at the end of the year, take her checkbook register and line up the checks against each category for each month. This could be an eye opener to her to see where she spends her money.
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Re: Help my 64yo mom retire!

Postby RobInCT » Sun Dec 30, 2012 8:44 am

I second what many people have said here. It seems like it's a good time to have a realistic conversation with your mom about her goals for retirement. Even if she's not up to looking at the numbers herself, you can involve her in the broad planning by explaining pros and cons of various approaches and asking which she prefers. For example, is it important to her to stay in her current house? Explain to her what downsizing would mean for her finances (what she would be able to afford, how much her monthly payments on all her debt would be, etc.). It might also help to explain that downsizing now makes it more likely she can retire now, though given your uncertainty about the selling price, I would definitely wait until the house was actually sold before handing in her notice. If she ends up getting a lot less than she expects, the extra income from working another year or two may become more important to her.

In terms of getting her comfortable with a debt-free lifestyle, would it help if you presented it as part of a transition to a "new" lifestyle? A fixed-income one, where she lives on what she has instead of on future earnings because she knows exactly what she's going to be making from now until forever. If she's uncomfortable being debt-free entirely, I'd at least start on the credit cards. Have you looked closely at the terms and conditions? 6% is amazing low for a credit card, but what happens if she misses a payment (e.g. because she has to go into the hospital, forgets to mail in the check one month, etc.)? Does it jump to 20%+? Part of planning for retirement is planning for a time when we're maybe going to be less sharp, more forgetful, less able to stay on top of our affairs, etc. If she's prone to spending more than she has, see if you can get her to agree that getting rid of credit cards altogether would be a way to simply her life in retirement and to lower risk.
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Re: Help my 64yo mom retire!

Postby celia » Tue Jan 01, 2013 7:34 pm

Here's what we did (which may also be useful to your mom) to see if we could afford to retire:

For 2 years before retiring, only live on the amount of income that will be coming in during retirement (pension). Put everything else in savings/retirement so that it is not touched. Her expenses need to include all taxes and health coverage.

During this time, your mom will have to make the financial decisions needed to actually live on less money. During that time, she will also have to decide if she will continue with the same debt or pay it off. (Heaven help her if the debt increases!)
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