Mom's retirement

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Topic Author
ks1773
Posts: 18
Joined: Sun Aug 19, 2012 7:17 am

Mom's retirement

Post by ks1773 »

Hello,

My mom is currently in a predicament where she is retiring at the age of 53 with 60k in her traditional IRA (which she's not going to withdrawal until ~10-15 years later) and 150k in capital 360 saving.

Asset wise, she has a fully paid off house worth ~500k where she is renting out for 1,900k/month. She is going to be living out of the country for 6 months at a time where her cost of living can be down to 1k USD a month.

Her main question is: Is there a better place to put away her 150k with very low risk that has a higher gain than 0.75% a month. We saw Ally's CD and are currently considering that.

Thank you so much!
toto238
Posts: 1914
Joined: Wed Feb 05, 2014 1:39 am

Re: Mom's retirement

Post by toto238 »

CIT Bank and Synchrony are offering 1% on high-yield savings accounts, that have a lot more flexibility than a CD.

CIT Bank also has a Jumbo 5-year CD that offers 2.4%.

So basically, her income for the next 10-15 years will probably be $1900 a month, but her expenses will only be $1k a month? What's the predicament here?
Topic Author
ks1773
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Joined: Sun Aug 19, 2012 7:17 am

Re: Mom's retirement

Post by ks1773 »

Thank you for your reply.

What about mutual funds?
dbr
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Re: Mom's retirement

Post by dbr »

Your mother's financial situation is a little unclear with some confusing statements in your post.

First her needs are for $1000/month for half the year, but what about the other half of the year? Second her tenant may be paying $1900 in rent, but there must be expenses, even enough to reduce that income to nothing after taxes and maintenance.

On the other hand she has about $210,000 in assets that she could spend to support herself. Pretty much no matter how that is invested one can't take more than 4% or maybe less for thirty years or so with pretty good assurance of not running out of money. That comes to $8,400/year from that source. You do not mention Social Security. If the real estate were sold, the assets would be more like $700,000 and could sustain an income of maybe $28,000/year without real estate costs, but before taxes and investment costs.

A single premium immediate annuity today could pay out about 5% guaranteed for life. To get $12,000/year would need an investment of $240,000 (proceeds from the house). Probably such annuities are not best at such an early age, but some thinking to using such a thing might be in order. But again, there is SS?
Luke Duke
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Location: Texas

Re: Mom's retirement

Post by Luke Duke »

That rent seems very low for a $500K house. Houses worth half that rent for close to the same amount in my neighborhood.
Gill
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Location: Florida

Re: Mom's retirement

Post by Gill »

Luke Duke wrote:That rent seems very low for a $500K house. Houses worth half that rent for close to the same amount in my neighborhood.
That's the first thing that jumped out at me. That represents a 4.6% gross return before expenses, meaning she is certainly incurring a substantial loss on the rental arrangement.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Topic Author
ks1773
Posts: 18
Joined: Sun Aug 19, 2012 7:17 am

Re: Mom's retirement

Post by ks1773 »

Thank you guys for the help and sorry for not explaining the situation clearly.

My mom has to retire this year (5/2015) at age 53 to help take care of grandparents at another country. This is something that we did not plan. My sister and I are trying to see what is the best approach to assist her financially.

She currently has a great tenant that pays 1,900/month and could possibly be why the rent is so cheap. I know houses around the same area rent out for about 2,100-2400. The house is priced high because we live in Orange County in CA. She recently paid the house in full. The yearly property tax + insurance comes out to be ~7000/year. So the current plan for the house is:

22,800 (gross rent) - 7000 (property tax + insurance) = 15,800
15,800 - 12,000 (for my mom's yearly expense) = 3,800

The left over 3,800 is for possible taxes (if she needs to pay) and house maintenance.

She is not going to receive SS until she's 62 and because she's retiring early, her SS will not be too much. We are estimating ~$800/month if we are lucky.

She will be living 6 month oversea with my grandparents for expense of 1k USD a month and when she's back in the States, she will be living with me rent free with food covered. Her main expenses will be healthcare (OBAMA care) and car insurance and maintenance. She currently has a paid off 2004 Camry that is in good condition.

We dont want to touch her liquid asset of 150,000 for as long as possible (so we want to maximize this without too much risk). Her 60,000 tradition IRA is currently in Vanguard and we don't want to touch that unless necessary either.

Also, is she qualified to contribute to IRA based on rent income?

Thank you for any advice!
dbr
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Re: Mom's retirement

Post by dbr »

So it is a pretty complicated situation.

I come back to the fact that using the house as a source of income doesn't make a lot of sense. She is tying up $500K to supply an income of $12000 or about 2.4%. But that income and that investment are at risk. That tenant could leave and be replaced by no one or by a tenant from hell, rental rates could fall, property values could fall, maintenance costs could be way underestimated with a disastrous effect on her margin, etc. Having around $750,000 but two thirds of it in a single residential property is not a very good idea.

In the long run you could make a back of the envelope estimate that a $750,000 stock and bond portfolio could be spent down at an inflation adjusted rate of 4% (or 3.5% or 3.0% if people want to be nervous) which is still $22,500 on the smallest of those numbers. You can add to that about $7000 in SS benefits, but with assets such as she has delaying SS might still make some sense, maybe about $3000/year more plus inflation adjustments. Another option is to look at eventually annuitizing some of the asset. At age 60 a monthly income of $1000, guaranteed for life, would only cost her around $200K, paying out at a rate between 5% and 6%.

I don't think an IRA makes any sense when a person is paying practically no taxes anyway. If that rental is her only income does she even have a tax due?

I think the thoughts of other posters would be interesting indeed.
Topic Author
ks1773
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Joined: Sun Aug 19, 2012 7:17 am

Re: Mom's retirement

Post by ks1773 »

Thank you so much for your reply.

If she were to sell her house, she could get 250k tax exempted (single) and the rest would have to be taxed. So realistically, she would probably net 410k (to be safe). Where would you put 560k (410k +150k) at this point?

I am estimating her life expectancy to be 93 (looking at average past family members age). So she would have to spread out the $$ over 40 years. 560k + 60k (in IRA) = 620k over 40 years is about 15.5k/yearly not including SS. The only thing that worries us is if she has a huge medical bill or something happens that requires a large sum of $$, we would not be able to come up with it.

I am currently looking up information on SPIA. I have never heard of this before, so thank you :)

If we were to keep the house and bet on good tenant (family), we can have a supply of $$ and sell the house when some unexpected event happens that requires extra money. However, as you said, we are betting on getting tenant and hoping that the maintenance fee won't be outrageous and of course no natural disasters, etc.
dbr
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Re: Mom's retirement

Post by dbr »

ks1773 wrote:Thank you so much for your reply.

If she were to sell her house, she could get 250k tax exempted (single) and the rest would have to be taxed. So realistically, she would probably net 410k (to be safe). Where would you put 560k (410k +150k) at this point?

Yes, that taxation is an issue and gives rise to some thought. Maybe someone has a good suggestion for how to manage that as well as could be. In any case if a person does change over to stock and bond investments an allocation to mutual funds in about a 40/60 stock bond ratio is a good conventional approach. The Vanguard Lifestrategy Conservative Growth Fund might be a good match. Others may have slightly different suggestions.

I am estimating her life expectancy to be 93 (looking at average past family members age). So she would have to spread out the $$ over 40 years. 560k + 60k (in IRA) = 620k over 40 years is about 15.5k/yearly not including SS. The only thing that worries us is if she has a huge medical bill or something happens that requires a large sum of $$, we would not be able to come up with it.

Those %ages I mentioned come out of people studying how people's retirements fare at various withdrawal rates for various lengths of time. It is important to include inflation as a factor in the expenses and also to consider the return the investments produce as time goes on. Given the possibility of starting SS at a certain point and perhaps giving up some assets for an annuity it might be enlightening to look as some of the models suggested in the wiki: https://www.bogleheads.org/wiki/Retirem ... d_spending You can enter unexpected expenses usually and see the effect if that should happen.

I am currently looking up information on SPIA. I have never heard of this before, so thank you :)

If we were to keep the house and bet on good tenant (family), we can have a supply of $$ and sell the house when some unexpected event happens that requires extra money. However, as you said, we are betting on getting tenant and hoping that the maintenance fee won't be outrageous and of course no natural disasters, etc.

And you are not getting very much net income, especially for the risk involved, but the tax issue does need consideration.


bluejello
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Re: Mom's retirement

Post by bluejello »

Hi OP,

It seems like your mom's current needs for income are low, but the future variability of expenses could be quite high. She is going to be living with family (your grandparents and you), she has a paid-off car, and her other normal expenses are only $1k per month. However, you want to be prepared in case she needs medical care or the house needs a roof replaced or some other major expense pops up. Is that correct?

In that situation, personally I would not go with a SPIA. An SPIA provides a steady stream of income, but in exchange for that you are giving up the assets. Your mom doesn't need to generate much income, but she does need to have assets "just in case".

I would sell her house. It's a) earning her a very low rate of return, and b) just too risky in terms of unexpected costs. What if the HVAC system breaks down, or the roof needs to be repaired, or she get a bad tenant who stops paying rent? An event like that could eat up a huge chunk of your mother's savings, and as a landlord I can tell you stuff like that happens all the time.

After the house sale, I would then structure her assets this way:

13 years * $12000 = $156k in a CD ladder. Ally Bank has great CD rates, and even their savings account pays 1%: http://www.ally.com/bank/cd-ladder/?INT ... calculator. This money is in very safe investments because it's meant for your mother to spend between now and age 66, when she can start taking Social Security. Do you know how much her SS benefits would be if she waited until age 66 to take them? She can register at http://ssa.gov/ to find out.

Remainder of assets ($410k from house sale + $60k IRA) in a 40% stocks /60% bonds portfolio. Take a look at Vanguard Lifestrategy Conservative Growth, Target Retirement 2020, or Wellesley Fund. Do not touch this portfolio for the next 13 years; just let it grow while she spends down the CD ladder. At age 66, your mother can start taking Social Security and then also start taking an 3-4% annual withdrawal from this portfolio.

Best of luck!
Last edited by bluejello on Mon Jan 12, 2015 9:25 pm, edited 1 time in total.
flyingaway
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Re: Mom's retirement

Post by flyingaway »

Did any one mention Roth conversion of the $60K tIRA?
ralph124cf
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Re: Mom's retirement

Post by ralph124cf »

How long has the house been a rental? This matters for the exclusion of the $250,000 for a single person. How much is the basis for the house? The income tax only applies on the profit, not the sales price. I am not sure of the tax law on this, but if she and her husband were living in it at the time of his death, than she may have a stepped up basis.

Be really sure that the proper tax returns are filed for the rental property.

I do agree with some other posters that $1,900 rent an a $500,000 property seems low, but I also know that a $500,000 property in Orange county might cost $50,000 in other parts of the country. Perhaps you will be able to raise the rent in the future.

Ralph
dbr
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Re: Mom's retirement

Post by dbr »

bluejello wrote: In that situation, personally I would not go with a SPIA. An SPIA provides a steady stream of income, but in exchange for that you are giving up the assets. Your mom doesn't need to generate much income, but she does need to have assets "just in case".
I agree that the SPIA takes some analysis. In any case one would never annuitize everything. More than that annuities are best purchased at older ages than mid fifties, so the suggestion might be for later on, if there is a need at all. I think the idea is to recognize that if income is the issue the opposite extreme from holding onto an asset that generates little income is not holding onto an asset but generating lots of income. Then one puts the situation into better perspective.
billfromct
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Re: Mom's retirement

Post by billfromct »

I didn't see anything about how your mom got the house. Did your father pass away or did they get divorced?

Also in order to get the $250k income exclusion from the sale of a primary residence, the owner will have to have lived in the residence 2 of the last 5 years when the house is sold.

Also your mother can collect on your father's SS record as long as they were married for 10 years & she didn't remarry before the age of 60. Basically 50% of his benefit if he is still alive or 100% of his benefit if your dad passed away. There are reductions if your mom starts to collect before your mom reaches her full retirement age (67?, you can check on "the google").

I don't know if anyone mentioned that your mom must have earned income (W2 income) in order to contribute to an IRA (traditional or Roth). A Roth would be preferential because she would be in such a low tax bracket if she got a part time job when she's in the US.

I would definitely have some of her assets in conservative stock funds like the Vanguard Equity Income Fund, the Dividend Growth Fund, etc. since she will be 30-40 years in retirement.

bill
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celia
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Re: Mom's retirement

Post by celia »

ralph124cf wrote:How long has the house been a rental? This matters for the exclusion of the $250,000 for a single person. How much is the basis for the house? The income tax only applies on the profit, not the sales price. I am not sure of the tax law on this, but if she and her husband were living in it at the time of his death, than she may have a stepped up basis.
+1

Are you assuming there will be $90k of taxes due on the sale of the house??? No way. You need good data as suggested above. If serious about selling the house (I would in this situation), you should have a real estate agent appraise it to get the actual selling price. Do not rely on online price estimates that don't take the condition of the house/upgrades into account. Is there earthquake insurance on the house? If not and the big one hits nearby, the value could drop to the value of the land. So that is a good reason to sell and lock in the value of the asset. (I would put it in a target retirement date fund.)

Has she considered getting a job for the 1/2 year she is back in the country each year? Her goal could be to earn at least enough to pay for her out-of-country expenses each year plus medical insurance. She would also be eligible to put more money into an IRA if she has earned income and it will help her SS benefit grow. Did her husband die? If so, she may be able to collect his SS if it is more than hers.

I was also thinking the same thing as another poster above about doing Roth conversions in the year(s) her income is low. Obviously you wouldn't do it in the same year that the house is sold.

If you are planning to claim her as a dependent on your tax return, be sure you understand the eligibility rules.
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.
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