Buyout Offer and Debt

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minskbelarus47
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Buyout Offer and Debt

Post by minskbelarus47 » Thu Jul 03, 2014 9:29 am

Need some advice.

Brother (age 74) has a retirement monthly payment from his old company where he gets around $875 gross, around $750 net from the retirement. He was offered 94K for a buyout. He can refuse the buyout and keep the monthly payments coming. Any comments as to this.

Secondly he also has around 35K in credit card and other debt that he says at the current rate he will never pay off and he must be paying somewhere 18 to 21% in interest. His thought was to take the buyout payment, get rid of the credit card debt, then take the 55-60K or so and spread out payments to around 350 to 500 a month or so. He is currently making payments of around 1100 a month (900 credit card and 200 new roof).

My thoughts were to maybe take a home equity loan with reduced payments and just keep the annuity. He has a VA loan, but they don't make enough to take itemized deductions. I am thinking that he would much lower payments taking a home equity loan. But, as he says, he isn't going to live forever, and the buyout gets him out from under this heavy debt where he sees no end. My brother works, gets social security, and his wife (younger) works, so there still is cash flow. Personally I hate to see that annuity go, but maybe getting out of debt with about 55-60K in the bank makes sense. They are back living within their means, so any help or possible options will be appreciated.

Let me know if you need any more info.

vested1
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Re: Buyout Offer and Debt

Post by vested1 » Thu Jul 03, 2014 9:36 am

Unless I'm mistaken, unless your brother rolls the lump sum into a tax sheltered account like an IRA it will be subject to tax as regular income. I would not suggest treating this money as a checking account. In order to take a portion of the lump sum out to satisfy the 35k in credit card debt he would probably have to count on about 20% more in taxes, depending on other income. That would leave less of a balance to convert to an annuity or to draw monthly from an IRA.

bloom2708
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Re: Buyout Offer and Debt

Post by bloom2708 » Thu Jul 03, 2014 9:37 am

You might need to fill in some additional details. Can they live off Social Security? Do they have any savings/investments beyond the pension?

That is some crushing credit card debt. They are using the entire pension payment and some of of their other income just to likely make the minimum payment.

The key is, will they cut up the credit cards and not use them again? If they don't, they will be back in this situation in a few years. If they are willing to make the commitment, I would probably cash out and pay this debt off. Taking out a home equity loan will help a bit, but not solve the problem.

I am curious what others think.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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BL
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Re: Buyout Offer and Debt

Post by BL » Thu Jul 03, 2014 9:53 am

Check http://www.immediateannuities.com/
to see what $100k would buy.

Sounds like he really needs that annuity and my guess is that it is a good deal.

He really needs to get rid of that CC debt, but am not sure how.

mlipps
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Re: Buyout Offer and Debt

Post by mlipps » Thu Jul 03, 2014 10:23 am

If he doesn't have the discipline to stay out of credit card debt, he doesn't have the discipline to parse out the lump sum into an appropriate monthly withdrawal. At 74, I would let the credit cards default & not worry about paying them off. Sounds like he already owns his home; what else could he need credit for? He's likely to have to stop driving in the next decade, so as long as his car will get him through that time, I can't think of anything else he would NEED to finance.

minskbelarus47
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Re: Buyout Offer and Debt

Post by minskbelarus47 » Thu Jul 03, 2014 10:29 am

You might need to fill in some additional details. Can they live off Social Security? Do they have any savings/investments beyond the pension?

That is some crushing credit card debt. They are using the entire pension payment and some of of their other income just to likely make the minimum payment.

The key is, will they cut up the credit cards and not use them again? If they don't, they will be back in this situation in a few years. If they are willing to make the commitment, I would probably cash out and pay this debt off. Taking out a home equity loan will help a bit, but not solve the problem.

I am curious what others think..

My reply:

I don't think they have much in savings, and they are living within their means now. They both have jobs (she full time, brother part time) but they have this debt. I know they must pay the minimum in income tax. I will ask him about his IRA's, as I know they are taking RMDs, or savings

Was thinking if they took the payout, and it went into his or her IRA, they could take half out at the end of the year, then the other half to cover the debt in January. I am sure they are in the 15% bracket at most. Then it is paid off. Maybe until then they could go into a spending deep freeze for a while and try to pay down.

Still, would like to see them not give up the annuity, but that is just my gut feel. I know I would hate to see mine go...

BlueCollarLawyer
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Re: Buyout Offer and Debt

Post by BlueCollarLawyer » Thu Jul 03, 2014 10:40 am

What are the downsides to default or BK? Seems to me if the credit card debt is the only drag on their otherwise solvent existence, I'd jettison the credit card debt by default or BK. Get that fresh start no matter how old he is. The buy out is a bad idea, IMHO.

minskbelarus47
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Re: Buyout Offer and Debt

Post by minskbelarus47 » Thu Jul 03, 2014 10:59 am

Regarding defaulting on CC debt is probably a non-starter. Wife is still working and younger, they still owe on the house, and credit is/would be an issue.

They are living within their means now, but need to resolve this debt. Don't know how much in IRA but there is some there. Will find out more.

Don't know if this changes anything but I don't think if brother dies, wife gets any annuity. Said that with their age differences, they would rather have that money up front. Looked at an immediate annuity for 50K which gives around 260 a month.

Still, wondering if a home loan might reduce monthly payments considerable, maybe from 900 to 600. I am sure the interest they are paying now is considerable.

minskbelarus47
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Re: Buyout Offer and Debt

Post by minskbelarus47 » Thu Jul 03, 2014 12:02 pm

Value of a 94k buyout buys an immediate annuity around 680. So, brothers current annuity from company is around 925-950 where he gets a little over 750. So, I think that is a good deal.

Was thinking if he could take half of his debt from his IRA, then do a home equity loan for the other half, he would most likely be better off. He has to do an RMD anyway, so he might as well bump that up to pay off half assuming he can come up with the other half.

Any comments on this????

ralph124cf
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Re: Buyout Offer and Debt

Post by ralph124cf » Thu Jul 03, 2014 12:26 pm

If he dies before his wife, does she get any benefit from the retirement account, or do all payments stop at his death? Since it is a younger wife, this is very important in planning.

Note: I agree that buying an immediate annuity for the $94K will only get about $680/mo. for a single life annuity for a 74 year old man, but if survivor benefits for the wife are wanted, then the payments would be less.

I would not take the buyout.

Ralph

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hornet96
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Re: Buyout Offer and Debt

Post by hornet96 » Thu Jul 03, 2014 12:33 pm

minskbelarus47 wrote:Value of a 94k buyout buys an immediate annuity around 680. So, brothers current annuity from company is around 925-950 where he gets a little over 750. So, I think that is a good deal.

Was thinking if he could take half of his debt from his IRA, then do a home equity loan for the other half, he would most likely be better off. He has to do an RMD anyway, so he might as well bump that up to pay off half assuming he can come up with the other half.

Any comments on this????
Couple of other questions to ponder. Upon your brother's death, is there a death benefit that would be paid to his wife? You mentioned that you didn't think the wife would be entitled to any continuing annuity payments, so perhaps not. If not, then I assume the value of the annuity immediately becomes $0 upon his death.

With that said, according to the SSA actuarial tables (http://www.ssa.gov/oact/STATS/table4c6.html), your brother has a remaining life expectancy of about 11 years (i.e. ~age 85). That would imply a total expected remaining value of gross annuity payments of about $115,500 (i.e. $875/mo x 12 months x 11 years). Since the company is offering a lump sum payout of $94K, that implies a discount rate of about 1.89%. One could look at this a couple of different ways:

1) This is a risk-free payout that "earns" 1.89%, which is less than the current yield on a similar duration 10-year treasury bond (~2.65%).

2) However, that reduction in risk-free "earnings" may be worth it, depending on other non-financial factors (i.e. your brother's health, peace of mind having the CC debt paid off, less demands on monthly cash flow with less debt, desire to leave part of the cash from this annuity benefit to the wife, etc.).

Just another way of thinking about this, as I would recommend thinking about this decision in an estate-planning context (in addition to the immediate cash-flow needs context).

lululu
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Re: Buyout Offer and Debt

Post by lululu » Thu Jul 03, 2014 1:00 pm

Do I understand this correctly:

$750 from old company
-$1100 to credit card and roof debt ad infinitum, at least for the credit card debt
------------------
net loss of $350 a month

take 94K buyout, use $35K to pay off credit card and roof debt,
away goes the $350 monthly loss and
leaves $59K in his pocket.

Is there tax on the 94K? Is there anything wrong with this picture?

JW-Retired
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Re: Buyout Offer and Debt

Post by JW-Retired » Thu Jul 03, 2014 1:18 pm

minskbelarus47 wrote:
I don't think they have much in savings, and they are living within their means now. They both have jobs (she full time, brother part time) but they have this debt. I know they must pay the minimum in income tax. I will ask him about his IRA's, as I know they are taking RMDs, or savings

Was thinking if they took the payout, and it went into his or her IRA, they could take half out at the end of the year, then the other half to cover the debt in January. I am sure they are in the 15% bracket at most. Then it is paid off. Maybe until then they could go into a spending deep freeze for a while and try to pay down.

Still, would like to see them not give up the annuity, but that is just my gut feel. I know I would hate to see mine go...
I would be worrying about triggering a big tax boost. If they are not already paying tax on 85% of their SS income then the marginal tax on the extra IRA withdrawel could be at some combination of a 27.75% and 46.25% rate. If you are in the zone of SS taxation phase-in based on the "other income" you receive, you can get these high effective tax rates applied to that IRA "other income". Since you said they are now in a nominal 15% marginal bracket I suspect this tax bomb could well be armed.

Suggest you run various payoff scenarios through TaxCaster and try to minimize the amount of the $94k lost to taxes. I think splitting the payments between 2 years could possibly make the tax loss significantly worse by keeping him in that high marginal rate zone both years. You have to run the numbers.

https://turbotax.intuit.com/tax-tools/c ... taxcaster/
JW
Retired at Last

minskbelarus47
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Re: Buyout Offer and Debt

Post by minskbelarus47 » Thu Jul 03, 2014 2:34 pm

lululu wrote:Do I understand this correctly:

$750 from old company
-$1100 to credit card and roof debt ad infinitum, at least for the credit card debt
------------------
net loss of $350 a month

take 94K buyout, use $35K to pay off credit card and roof debt,
away goes the $350 monthly loss and
leaves $59K in his pocket.

Is there tax on the 94K? Is there anything wrong with this picture?
Yes, pretty accurate.

$750 from old company after taxes. He said it is about $925-950 gross.

I think debt payments are between 900 and 1100, but let's figure 1100 ad infinatum until I can get back to bro.
From what folks have said the buyout has to go into an IRA or some other tax deferred instrument, otherwise it will be all taxed. I don't know if he buys an annuity with the buyout proceeds that he has to pay taxes on that. ANYONE OUT THERE HELP ON THIS????

I am quite certain that his current retirement annuity from old company ends when he dies, with nothing to his wife. They both retired from the company at the same time and decided not to do that.
But, based on his SS life expectancy of 11 years, with lets say $60 K left, that is approximately 132 months into 60K is $454 times .85 (15% tax rate) is $386. AM I GOING IN THE RIGHT DIRECTION HERE??? Could that be a way to go, especially with the debt gone, maybe they could bank some more. And, some time out there he will need to give up the blue light special job...

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grabiner
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Re: Buyout Offer and Debt

Post by grabiner » Thu Jul 03, 2014 5:32 pm

minskbelarus47 wrote:[
$750 from old company after taxes. He said it is about $925-950 gross.

I think debt payments are between 900 and 1100, but let's figure 1100 ad infinatum until I can get back to bro.
From what folks have said the buyout has to go into an IRA or some other tax deferred instrument, otherwise it will be all taxed. I don't know if he buys an annuity with the buyout proceeds that he has to pay taxes on that. ANYONE OUT THERE HELP ON THIS????
If he rolls the buyout into an IRA, the money is not taxed, but it will then be taxed (at whatever his tax rate is at the time) when it is withdrawn from the IRA. If he rolls it into an IRA and buys an annuity inside the IRA, the annuity payments will be taxable. (This is probably not a good deal, as he has a better annuity rate from his company.)
But, based on his SS life expectancy of 11 years, with lets say $60 K left, that is approximately 132 months into 60K is $454 times .85 (15% tax rate) is $386. AM I GOING IN THE RIGHT DIRECTION HERE???
Not necessarily. The SS life expectancy is based on the average life expectancy of all 74-year-olds. Some 74-year-olds have cancer or heart disease and expect to live much less than 11 years; others are in excellent health and may be expected to live until 90. If he is in good health, he gets an even better return from keeping the pension than you calculated. (And that is why the commercial annuity rates are lower than the pension buyout rate; people who buy commercial annuities tend to be in better health than average.)

Therefore, I would recommend keeping the annuity if he is in good health, provided that they can cut up the credit cards, take out a home-equity loan to lower the interest rate on the debt, and live below their means. That last step is key; if they take out a home-equity loan and don't manage the debt, they will lose their home. (Ideally, they could take out the loan with a fixed monthly payment of the $1100 they are currently paying; this would not affect their spending money but would clear the debt in three years.)

If they cannot get a home-equity loan (say, because they don't have enough equity in the home), then it would be best to take the buyout, pay off the debt, and live on whatever is left. Yes, there is a tax cost involved, but the tax cost is less than they are losing to interest on those cards.
Wiki David Grabiner

ralph124cf
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Re: Buyout Offer and Debt

Post by ralph124cf » Thu Jul 03, 2014 5:36 pm

If the payout from the company is into an IRA, there is no tax due on the company's payment to the IRA. HOWEVER, every dollar that comes out of the IRA is fully taxable in the year that it comes out. buying an annuity with IRA money is not a taxable event, but all payments from the annuity are taxable.

Ralph

lululu
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Re: Buyout Offer and Debt

Post by lululu » Fri Jul 04, 2014 12:10 am

Unless I missed it, was there a discussion of transferring the credit card balance to less usurious cards? Is that possible for them?

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