Disabled parent looking to invest for the first time

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1x85zn
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Disabled parent looking to invest for the first time

Post by 1x85zn » Wed Feb 26, 2014 5:54 pm

I'm posting on behald of my parent who is disabled. Not your typical retirement post so hopefully we can receive some guidance.

Stats: 52yrs old, disabled.
Bank Account: 7k
Debts: Home Loan @ 9.5%, 100K balance.
Loans: $43,000 - Will be forgiven due to disability.
Income: Social Security + Workmans Compensation, which will transition to Pension Plan (Retired).
Retirement Savings: $0
Yearly income is about $45,000, but not considered "Earned income".

She received a settlement of roughly 300K, which is not subjected to taxes.
-immediately payed down 20K to her mortgage (leaving a balance of 100k).
-paid her daughters car off (5k).
-gift to her mother and children of 20k

So she has about 250K left. Naturally, she is terrified of investing and I've spent countless hours teaching her about frugality, personal finances, and basic bogle head principles.

She's ready to get started but not excited to invest heavily for retirement because she feels that its already taken care of with SS+Pension for the rest of her life. The amount is sufficient to live off (even with her very expensive health care of nearly $800mo). Her home will be paid off in <5 years, and she feels that this equity will come in handy later on in life when she sells it and moves to a smaller place.

Does anyone have any advice for this situation? I dont think that she qualifies for Roth IRA or Traditional IRA because she does not meet the "earned income" requirements. I was considering a regular brokerage acct and a vanguard index fund. There is no tax advantage there though. She likes the idea of dividend paying stocks, but may not need them until later on.

Any way, any advice would be appreciated.
Last edited by 1x85zn on Thu Feb 27, 2014 4:20 pm, edited 1 time in total.

Professor Emeritus
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Re: Disabled parent looking to invest for the first time

Post by Professor Emeritus » Wed Feb 26, 2014 6:06 pm

You need far more than ordinary financial advice
It looks like a lot of money but it isn't
She will likely need EVERY cent in the future. Stop the gifts NOW
My wife is disabled. It's a totally different financial /legal environment.
The money and the house should be in a medicaid shelter trust for her needs
If she is getting SS she will also be eligible for medicare in 2 years.

Only after setting up the shelters do you worry about how to invest it. Lots of good conservative choices
Wellington is a favorite of many disability trusts

1x85zn
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Re: Disabled parent looking to invest for the first time

Post by 1x85zn » Wed Feb 26, 2014 6:43 pm

I can't stop the gifts because these are her wishes. But thank you, this is exactly why I'm posting . She is already receiving medicare and still pays for her other insurance (secondary). Because of her health conditions we haven't been able to get the advice needed to move to a lower cost secondary insurance.

MathWizard
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Re: Disabled parent looking to invest for the first time

Post by MathWizard » Wed Feb 26, 2014 6:58 pm

Debts: Home Loan @ 9.5%, 100K balance.
Investing with such a high interest rate is like trying to swim with a rock tied to your waist.

I would look to get that interest rate reduced, even if she needs to pay down the mortgage some more
if she is underwater.
That is $9500/year going out just in interest. If she can go with a 15 year fixed rate loan, and has a decent
credit score she should be around 3.5% with a fixed rate.

I definitely agree that $250K is not a lot of money. It would be nice if the daughter paid back the car loan
amount to her, even without interest.

1x85zn
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Re: Disabled parent looking to invest for the first time

Post by 1x85zn » Wed Feb 26, 2014 7:06 pm

Thanks. We agree that 9.5% interest was a top priority, but she has bad credit and refinancing was out of the picture. Who does she need to call for advisement?

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BL
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Re: Disabled parent looking to invest for the first time

Post by BL » Thu Feb 27, 2014 12:01 am

I would seriously consider paying off the 100k mortgage if she can't get a decent loan rate. There is no way she will get it paid off in 10 years with that interest rate without a huge hunk of money each year. That might open her up to a future reverse mortgage or selling it later.

Also she sounds like many people who simply have to spend or give away a hunk of money until it is gone rather than saving it for future needs.

Putting money in CDs may feel safe to her and protect it from everything but inflation.

A SPIA may also be something to consider, maybe later, for a guaranteed income as long as she lives.

I would also look for services available to disabled and seniors.

1x85zn
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Re: Disabled parent looking to invest for the first time

Post by 1x85zn » Thu Feb 27, 2014 10:58 am

Thanks. I have reached out to her Social Security lawyer to see if he knows anyone who can help.

deikel
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Re: Disabled parent looking to invest for the first time

Post by deikel » Thu Feb 27, 2014 11:18 am

+1 on the stopping all further gifts and give aways

Consider this: SHe got the 300k for a reason, its designed to compensate her extra struggles due to disability for the rest of her life - if she is giving it away now, that may fall on her head later

+1 on paying back the mortgage

Consider it this way: If she pays back the mortgage its like funding a bond that would pay 9% interest - I would do a lot to get such a bond in my portfolio. The property value might rise or fall over time for sure, but any bond giving 9% would have a similar risk structure. Your average expected stock market return is only 6 % and it comes with heavy fluctation and is by now means certain. ALso, since she has no earned income to report, any interest payments could not be deducted from tax I would think - since I assume you wont pay taxes to start with.

With a reduced mortgage burden AND the steady income from SS and Pension of 45k, she should be easily be able to live off that amount of money.

Now, I am not sure how disabled she is and what extra medical care she needs now (cost wise) or in the future (is the medical need growing more due to her disability or just normal aging) - the post does not say, but that would be something to consider.

The 800/month in secondary insurance seems very high. Thanks to Obamacare her precondition should not matter for an insurance. I would contact a health care insurance broker to figure this out exactly - it sounds like some savings might be possible here.

Any left over money should go into a brokerage account - since she has nothing that counts as earned income apparently (really ?), there seems little need to try to be tax evasive. Given her significant income from other sources a high stock asset allocation is entirely reasonable (with the house in teh background as additional emergency funding to be tapped into if required) - maybe 80-20 stock bond
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.

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Random Musings
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Re: Disabled parent looking to invest for the first time

Post by Random Musings » Thu Feb 27, 2014 11:42 am

Even though she gifted, hopefully that money will be tucked away in case she needs it later on. If she doesn't, that's fine, it's a long-term holding.

Pay off the 9.5% mortgage.

After paying off the mortgage, think was type of portfolio risk she needs on top of her $45K/yr income (less $10K medical) to meet her goals.

Sounds like she is risk adverse, so perhaps a 30/70 portfolio may be a starting point. That way, if the market gets carved in half, most of it is left.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

1x85zn
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Re: Disabled parent looking to invest for the first time

Post by 1x85zn » Thu Feb 27, 2014 1:19 pm

I'm certain she will pay off the bulk of the mortgage. We're still stumped on who to call for advice? Clearly the Social Security+Medicaid+Disability+Health Care components complicate things. The zipcode is [(removed)] if anyone has recommendations.

[I removed the zip code because the combination of the OP's employer, situation, and zip code may be enough to identify someone personally. --admin LadyGeek]

1x85zn
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Re: Disabled parent looking to invest for the first time

Post by 1x85zn » Thu Feb 27, 2014 9:23 pm

If anyone can tell me the best resource to help with this situation, please let me know. We are lost...

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BL
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Re: Disabled parent looking to invest for the first time

Post by BL » Thu Feb 27, 2014 9:36 pm

deleted.
Last edited by BL on Tue Mar 04, 2014 11:52 pm, edited 1 time in total.

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Taylor Larimore
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Pay off the "home loan."

Post by Taylor Larimore » Thu Feb 27, 2014 9:45 pm

1x85zn:

Based on the information provided, your parent should immediately pay-off the 9.5% "home loan."

It is foolish to have $250,000 in cash (yielding a pittance) when she can receive a guaranteed return of 9.5% (and the satisfaction of a debt-free home) simply by paying off her home loan. Her income will also increase by the amount of loan payments no longer being paid.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

1x85zn
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Re: Disabled parent looking to invest for the first time

Post by 1x85zn » Fri Feb 28, 2014 10:46 am

Thank you for the feedback.

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Watty
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Re: Disabled parent looking to invest for the first time

Post by Watty » Fri Feb 28, 2014 6:00 pm

Good advice so far. I agree , pay off the mortage and stop giving away large amounts of money.

Is the pension inflation adjusted? If not then she will need the money to make up the los of purchasing power. The real math is even worse becuse of compounding but 3% inflation for ten years will reduce the value of her pension by more than 30%.

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Mrs.Feeley
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Re: Disabled parent looking to invest for the first time

Post by Mrs.Feeley » Sat Mar 01, 2014 7:27 am

If she's on Medicare wouldn't it make more sense for her to subscribe to Medicare Part B than to pay $800/month for a supplemental policy? I think Part B is under $200.

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BL
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Re: Disabled parent looking to invest for the first time

Post by BL » Sat Mar 01, 2014 9:12 am

Mrs.Feeley wrote:If she's on Medicare wouldn't it make more sense for her to subscribe to Medicare Part B than to pay $800/month for a supplemental policy? I think Part B is under $200.
These are two different things and she probably pays both.

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tuckeverlasting
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Re: Disabled parent looking to invest for the first time

Post by tuckeverlasting » Sat Mar 01, 2014 4:42 pm

OP states "Loans: $43,000 - Will be forgiven due to disability."

This may be reported to the IRS as a cancellation of debt, and may be fully taxable, as the amount forgiven is considered income by the IRS. The creditor is supposed to send you a Form 1099-C. Something to be aware of.

https://www.nolo.com/legal-encyclopedia ... 29792.html

Tax Consequences When a Creditor Writes Off or Settles a Debt
The IRS may count a debt written off or settled by your creditor as taxable income.
It's Good To Be A Boglehead

1x85zn
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Re: Disabled parent looking to invest for the first time

Post by 1x85zn » Tue Mar 04, 2014 8:26 pm

Thank you, yes, we're aware of the huge bill coming!

Calm Man
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Re: Disabled parent looking to invest for the first time

Post by Calm Man » Tue Mar 04, 2014 10:04 pm

OP, your mother may end up broke one day with the health premiums, possible medical costs and unknown expenses. Her anticipated income is not as high as she thinks it is. I was incensed when I read the initial message that the daughter actually allowed her to pay off her loan, her mother actually took a gift and her "children" took gifts. How could they? How dare they? Is this woman in such bad shape (it looks like she would have nothing except for her disability settlement) because she is always giving to a number of willing takers? I know you are not one of them but just in case you are, I suggest figuring out a way to give it back somehow even if paying extra mortgage payments for her. She is not in good shape. She also, I suspect, is going to resist any attempt to put her into equities or even bond funds and is probably the type that will want CDs and money markets and get no returns. I hope I am wrong in everything I have said here.

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