need advice on soon to retire parents

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Topic Author
EnjoyIt
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Joined: Sun Dec 29, 2013 7:06 pm

need advice on soon to retire parents

Post by EnjoyIt »

AMENDMENTS IN BOLD

My parents 72 and 62 have asked me to help them with their retirement. For years they have actively traded stocks, almost never added money to a 401K or the likes and are looking to retire in 2-3 years. Their goal is to stop stock picking, make things simple which does include index funds, and generally prepare for retirement. They choose to work, because they want to continue living in their current high cost of living area for at least another 2-3 years as well as build up my mothers social security benefit.

The first advice I gave them is to maximize work 401K, create a SEP IRA for home business they are running (I opted out of solo 401K because I want to keep it a bit simpler as per their request.) $23K into 401K and if business continues another $25K into SEP IRA

The basics
He is 72 / she is 62 longevity is in our family as both my parents are healthy.
Fed Tax rate 28% / State 6.5%
His SS ~$30K
Her expected SS at age 66 will be ~$24K
Home ~$220K mortgage with ~$380K in equity today
Taxable account:
multiple stocks worth about ~$525K (in this account sits a couple of stocks that are worthless and availible for tax loss harvesting ~$120K
HIS IRA $31K in RMD (in individual stocks. last RMD ~$1,350
Her IRAs and 401Ks combined in individual stocks ~$170K


Their goal in retirement(2-3 years) is to sell the house, move and buy in a much lower cost of living area, with no state tax near me. Preferably paying cash for the home. Probably about $275K-$325K. Spend another $50K-$75K on a remodel to make it their dream retirement home if need be. Sell both their cars and buy a CPO Lexus. Based on my calculations, they can probably live comfortably on just SS and no debt. The extra cash $25K-35K/year should fund them their vacations and other splurges. If I had it my way I hope they leave me nothing and enjoy all of their money.

They are comfortable selling all their stocks as they have a large loss sitting there for tax loss harvesting and will not have to pay taxes on gains.
I gave them the Boglehead Guide to Investing, but they are having a hard time finishing it.
They have no idea what they want their asset allocation to be and want me to figure everything out for them.
I am not fully thrilled at taking on this responsibility because we all know the market will drop one day and I don't want them blaming me for any lost assets. They say they wont, but who knows what reality will bring. Historically in the several recessions they have been investing in, they have not sold at the bottom except in companies that were poor investments and went bankrupt. Therefor they have psychological experience with market lows. Either way I am charged with this responsibility and I am willing to take it on. In reality all this will be my responsibility in the future regardless of what happens today.

They want to keep it simple and want nothing to do with rebalancing. All they want is to be able to pull money when they need it, and have a limit on how much they can withdraw. Therefor I think a the simplest thing I can do is to have them put all their money into Vanguard Wellesley Income Fund Admiral Shares. It has an ER of 0.18% is 40/60 stocks bonds which I think would be a pretty good asset allocation for their ability to take risk but still have enough growth to keep up with inflation and a 4% withdrawal rate. After further discussion they are willing to do rebalancing and therefor I may be doing a 3-5 fund portfolio (need to learn more about TIPS)

Please offer me up some advice. Even harsh painful criticism is accepted.

I have no problem in having my parents read the replies if I think it will help.

EDIT 8/16/14 made some value corrections above and other changes in bold.
Last edited by EnjoyIt on Sun Aug 17, 2014 1:37 pm, edited 4 times in total.
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Watty
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Re: need advice on soon to retire parents

Post by Watty »

My only concern is that for the next 2-3 years the interest on the bonds will be taxed pretty high considering almost all their wealth is in a taxable account. Seams like the tax will add up to about $8K+ over 3 years (more if the fund increases and if they continue to contribute to it.) Once retired they will pay almost no taxes.
What is the interest rate on their current mortgage? Since they will be selling in a few years they might pay off their current mortgage now which would be like getting a CD at the same interest rate(after adjusting for taxes). When they sell it and move they they could use that cash to buy their next house.

That would leave then with $100K in the IRA and about $400K in the taxable account so they could at least fill up the IRA with bonds and need to have around $200K in bonds in the taxable account. At the current low interest rates that would not generate a lot of taxable income each year.
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celia
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Re: need advice on soon to retire parents

Post by celia »

To make the best decisions, I think you need a little more information:

1. Ask to see their income tax returns for the last 3 years. There may be other things that contribute to their tax bill that they are forgetting. You'll also be able to verify the sources of all their income.

2. Estimate their yearly income for the next 10 years with the goal of leveling it out. Are there RMDs? See where the lower-income years are as that is when you/they would prefer to have capital gains. If there are higher-income years, that's when they can sell the losers (unless they want to purge them early so they can re-invest the money). If they are selling their house and moving to another state in the same year, they might minimize the taxes on capital gains on the house if they sell early in the year, then move so they are in the no-income-tax state for over half the year.

3. Help them draw up their yearly budget and have them actually live on that amount until retirement to get some certainty of their actual (non-travel) living costs.

4. Keep records of all their income sources and how much is in each account. I like to do this in a spreadsheet and add a new column each year showing the year-end value for each account. (I actually have 2 columns for each year--one is an adjoining column showing how much money was added to or withdrawn from each account in the year. In the future, I don't want to look back and think that the xxxx account lost $10K in one year when I actually had to withdraw $12k while the fund grew $2K, not really losing money.)

5. This might be a good time for them to update/create their estate plans and powers of attorney.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
gd
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Location: MA, USA

Re: need advice on soon to retire parents

Post by gd »

"move and buy in a much lower cost of living area, with no state tax. Preferably paying cash for the home." If this is all there is to it, no. Move to where they want to live for the rest of their lives, or at least the next 10 years, not because it has no state income tax. I know someone who moved to New Hampshire partly to escape income tax (actually I know lots of people who've done this), then she retired with no salary, a paid-for house, a life she didn't want to uproot, and suddenly realized that the state uses property taxes to pay the bills. They might also consider the effect of living in the midst of minimally funded services-- emergency, police, fire, street maintenance, senior services, and well-educated youth-- but that's a more complex issue.

Edit- I wrote "income tax", but argument applies to sales tax as well (NH has neither).
gd
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Location: MA, USA

Re: need advice on soon to retire parents

Post by gd »

"If I had it my way I hope they leave me nothing and enjoy all of their money." Interest rates aside, the easy way to do that is an annuity or two. Will you maximize investment gain? No. Will they have an easy, straightforward and pretty-darn-safe situation? Yes.
Sidney
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Joined: Thu Mar 08, 2007 5:06 pm

Re: need advice on soon to retire parents

Post by Sidney »

EnjoyIt wrote:I am not fully thrilled at taking on this responsibility because we all know the market will drop one day and I don't want them blaming me for any lost assets. They say they wont, but who knows what reality will bring. Historically in the several recessions they have been investing in, they have not sold at the bottom except in companies that were poor investments and went bankrupt. Therefor they have psychological experience with market lows. Either way I am charged with this responsibility and I am willing to take it on.
The best way to fix this is help them connect to a fee-based planner.
I always wanted to be a procrastinator.
Topic Author
EnjoyIt
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Joined: Sun Dec 29, 2013 7:06 pm

Re: need advice on soon to retire parents

Post by EnjoyIt »

Thank you all for your advice. I will respond to all of you.
Watty wrote: What is the interest rate on their current mortgage? Since they will be selling in a few years they might pay off their current mortgage now which would be like getting a CD at the same interest rate(after adjusting for taxes). When they sell it and move they they could use that cash to buy their next house.
I got some specifics today. They owe $220K @ 4.5%. The thought of paying off that mortgage did not occur to me. Since property tax alone is above the standard deduction they would continue to itemize their deductions with a paid off house. The math therefor comes out to an effective mortgage interest of 2.95%. Is this worth it?
celia wrote:2. Estimate their yearly income for the next 10 years with the goal of leveling it out. Are there RMDs? See where the lower-income years are as that is when you/they would prefer to have capital gains. If there are higher-income years, that's when they can sell the losers (unless they want to purge them early so they can re-invest the money). If they are selling their house and moving to another state in the same year, they might minimize the taxes on capital gains on the house if they sell early in the year, then move so they are in the no-income-tax state for over half the year.
There will be no income in 3 years other than SS and RMD. SS will be ~54K/year. RMDs are currently on $31K (HIS IRA) $1,350 for another 8 years before her RMDs kick in currently $170K (HER IRA) Hopefully by the time she retires in 2-3 years it will be closer to $270K due to current contributions. The idea of selling the house in the beginning of the year is a great one.
celia wrote:3. Help them draw up their yearly budget and have them actually live on that amount until retirement to get some certainty of their actual (non-travel) living costs.
Unfortunately this is impossible to do accurately. I have done an estimate for where they are going to move, but it is only an estimate. I just don't know exactly how much they will pay for lawn service, utilities, gas, car insurance, groceries, restaurants, and etc since all that will change.
celia wrote:4. Keep records of all their income sources and how much is in each account. I like to do this in a spreadsheet and add a new column each year showing the year-end value for each account. (I actually have 2 columns for each year--one is an adjoining column showing how much money was added to or withdrawn from each account in the year. In the future, I don't want to look back and think that the xxxx account lost $10K in one year when I actually had to withdraw $12k while the fund grew $2K, not really losing money.)
Great idea.
celia wrote:5. This might be a good time for them to update/create their estate plans and powers of attorney.
Agreed. Because of your post, I will have them read this thread.
gd wrote:"move and buy in a much lower cost of living area, with no state tax. Preferably paying cash for the home." If this is all there is to it, no. Move to where they want to live for the rest of their lives, or at least the next 10 years, not because it has no state income tax.
They are moving to near where I live, therefor it is not just for the taxes and decreased COL. Plus it is close to a large international airport which will make travel easy.
gd wrote:"If I had it my way I hope they leave me nothing and enjoy all of their money." Interest rates aside, the easy way to do that is an annuity or two. Will you maximize investment gain? No. Will they have an easy, straightforward and pretty-darn-safe situation? Yes.
That is not a bad idea, and we will need to explore it further. I planted the seed in in their mind today. Will revisit it again soon.
Sidney wrote:The best way to fix this is help them connect to a fee-based planner.
No can do. It will be way to easy for them to get taken advantage of, and therefor I will have to make sure I agree with everything the advisor recommends, and I am back in the loop.

On another note, after todays discussion, I have not given them enough credit, and realize that they may be willing to rebalance accounts once a year or every 6 months, and we may be heading to a 3 fund portfolio after all (actually 4 fund using some of their taxable space to buy intermediate term tax exempt bonds index fund.) They agree to rebalancing twice a year with my assistance which will allow them to understand what we are doing. I will also help them write an IPS to follow incase I am never able to do this. My wife is also well versed in managing our finances and should be able to help if something happens to me.

Lastly, I have made some amendments to OP to reflect more data I collected today. Please keep the comments coming and thank you again.
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Watty
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Re: need advice on soon to retire parents

Post by Watty »

EnjoyIt wrote: Watty wrote:
What is the interest rate on their current mortgage? Since they will be selling in a few years they might pay off their current mortgage now which would be like getting a CD at the same interest rate(after adjusting for taxes). When they sell it and move they they could use that cash to buy their next house.


I got some specifics today. They owe $220K @ 4.5%. The thought of paying off that mortgage did not occur to me. Since property tax alone is above the standard deduction they would continue to itemize their deductions with a paid off house. The math therefor comes out to an effective mortgage interest of 2.95%. Is this worth it?
If they don't then they will have most of that $220K at a lower effective interest rate. If they had a paid off house they would laugh at you if you suggest that they take out a 4.5% mortgage to buy bonds that are earning 2% or so.

It is far from exact but in some way a mortgage is like a negative bond so in some ways they asset allocation is very roughly;

$500K in stocks
$200K in bonds
-$220 in a bonds (the mortgage as a negative bond)

So looking at it that why their current asset allocation is over 100% in stocks which is way too aggressive.

You can search the boards to find some discussions about treating a mortgage as a negative bond and there are some mixed opinions.

For a reality check consider if they had $500K in cash and a paid off house, then they would not choose to go to that sort of asset allocation.
Topic Author
EnjoyIt
Posts: 8272
Joined: Sun Dec 29, 2013 7:06 pm

Re: need advice on soon to retire parents

Post by EnjoyIt »

That is some good thinking. I pled the case regarding home mortgage payments and will see what the answer will be. I finished collecting all the data and will need to create a portfolio next. Please see additions to data in OP (they are in bold)

Thanks again.
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