Parents close to retirement

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Dumbo
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Parents close to retirement

Post by Dumbo » Mon Oct 07, 2013 10:47 am

I need some advice on helping my parents as they prepare for their retirement. They're in their mid 50's and not native English speakers so all of these types of things are way too complicated to them. I'm also afraid of sending them to an attorney when they're half a country away and I can't be there to translate and understand what's happening.

Their finances are pretty simple. They have a house which they almost completely own. They have some cash in their checking, but not a lot. Mom has a 401K but that's not much, maybe 30k at this point. I don't believe they have IRA's either. Last week Dad was asking about possibly buying a house, upgrading, and basically trading a 150k nearly paid off house for a 200k home.

They live in Nebraska so property taxes are pretty high. Their plan B has always been to move back to our homeland and just collect social security, sell the house here and basically that would be enough money to get them through the rest of their lives. Not a bad plan I guess.

What are some things they should be considering right now? I'm trying to convince them to stay in the states and just move to a different state with lower taxes. But then there's the subject of death taxes, or what happens when they sell a home in Nebraska and buy an equivalent home in Florida. I'm not knowledgeable enough to say "yes this means you're going to have to pay a tax on the total 150k sale price" or just on the difference between what it was bought for and sold for.

I know typically the advice on the forum is not to meddle in family financial planing too much, but that's been pretty much my second job since I was 19. When they bought their first home they knew zero English, I did all the translating and had to figure out all the ins and outs of how it works, having only been in US for 3 years at that point. I still remember them trying to sell me on an ARM loan being a good idea for them.
Those people who think they know everything are a great annoyance to those of us who do. - Isaac Asimov

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PaddyMac
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Re: Parents close to retirement

Post by PaddyMac » Mon Oct 07, 2013 10:57 am

You didn't mention how they make their living and how long they plan to work for.
What type of SS payments are they looking at? (SS office will give you estimates.)
What is their tax bracket (i.e., is the home mortgage interest deduction useful to them).

Upgrading a house seems a bit delusional to me. They are already house rich/cash poor, and a larger more expensive house is only going to make that worse. If their house is almost paid off, seems best to stay in it. What is their mortgage interest rate? If it's high, they might want to accelerate the payments and then start saving the mortgage payment in investments.

If they have been living in their home for a few years (sounds like it), then they can sell it and pocket up to $500,000 profit tax free. The old rule of rolling over the profit into another house is gone now.

But overall, sounds like they need to start saving more overall.

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Dumbo
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Re: Parents close to retirement

Post by Dumbo » Mon Oct 07, 2013 12:13 pm

Well they have some 50k in cash I think and maybe 20-30k left in payments so they're anything but house poor. They've been making double and triple monthly payments on the mortgage for past 10 years. Combined income is around 80k I think with most of that skewing to my dad.

I believe their plan was to work until they can retire, so 62 or so for their age bracket. Their interest rate is quite small, I think in high 3%. It seems silly to buy a new house. They want a ranch style home which I actually agree is a smart idea. Just not sure that a new ranch home and in Nebraska is the smartest decision. But I did not know about the 500k exception, that's good to know.

I don't know about their social security payments and how that breaks out for them. We've only been in the country for 13 years and I seem to recall that your SS payments are calculated based on last 20 years of income, which they won't fully have at their retirement age. Not sure if that has an impact or not.

I'm just not convinced that Nebraska is the best state to retire in, but I couldn't actually support that with any research as to why. I thought maybe somoene on here could make a convincing argument as to why retirining elsewhere would be more beneficial. Their plan B of moving back to the old country, selling all property here would probably net them some 200k in cash. Along with that they'd have a hypothetical 500-1000 a month in social security, it would go a long way back in the homeland.

So on one hand they can retire ok/somewhat poor in US, or they can retire rich back in their own country. Obviously I wouldn't want them to move back, but they seem OK with it, and I can't argue against it from the logical/monetary point of view. Not to mention the fact that they'd have mostly free healthcare back home.
Those people who think they know everything are a great annoyance to those of us who do. - Isaac Asimov

DouglasDoug
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Re: Parents close to retirement

Post by DouglasDoug » Mon Oct 07, 2013 1:02 pm

Where exactly is "homeland"? Retiring to say, Mexico, would be different than retreating to France.

enebyberg
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Re: Parents close to retirement

Post by enebyberg » Mon Oct 07, 2013 1:36 pm

I would recommend that you visit this website. It compares taxes in all 50 States and allows you to click on a state and find more information on sales tax, property tax, income tax, etc. It does show that Nebraska is one of the worst tax States to retire in. Good Luck!

http://www.kiplinger.com/tool/retiremen ... /index.php

The Wizard
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Re: Parents close to retirement

Post by The Wizard » Mon Oct 07, 2013 2:24 pm

I think we would need a lot more information about the OP's parents to be able to give decent advice.
I would start with determining what their baseline + discretionare budget is and where they expect that money to come from in retirement. Switching from one house to another in retirement isn't necessarily a huge issue, but focussing too much on that now is obscuring more important facts...
Attempted new signature...

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Dumbo
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Re: Parents close to retirement

Post by Dumbo » Mon Oct 07, 2013 3:07 pm

Home is back in eastern europe, so basically slightly better than Mexico and way better than France (had to get the France jab in there).

I didn't realize social security benefits can be treated as taxable income. I'll have to pass this info on to my parents.

My parents are pretty cheap so they don't spend too frivolously, which is how I became a boglehead, hehe. I know they'll splurge on certain things once in a while. They spend no money then they drop 10 grand on a vacation. I'm much more by the book budget but my parents never had a set budget like I do. My mom was a bookkeeper in her past life so she maintains pretty good books and my dad is self employed. I think I'd need to set them up in Mint or Quicken to figure out how much they're spending and where it's going into.

There's also the subject of my younger brother who turned out to be much more of a challenge than they thought so now they're kind of supporting him on and off. That's a whole other topic though. I don't know what kind of financial impact he has. Probably just comes home for food when he's not living with mom and dad.

I'll ask my parents about spending but I'm not too optimistic about the type of answers I'll get.
Those people who think they know everything are a great annoyance to those of us who do. - Isaac Asimov

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PaddyMac
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Re: Parents close to retirement

Post by PaddyMac » Mon Oct 07, 2013 10:42 pm

Dumbo wrote:Well they have some 50k in cash I think and maybe 20-30k left in payments so they're anything but house poor. They've been making double and triple monthly payments on the mortgage for past 10 years. Combined income is around 80k I think with most of that skewing to my dad.
I said "house rich/cash poor" not "house poor".

$50K isn't going to last very long in retirement if they don't have decent SS, and 13 years is not very much time. I would encourage you all to learn more about SS and how to maximize their payments. My guess is that working until 67 or 70 would be a good idea, unless he is in poor health (or expects to be at 62).

Did your parents work in other countries in Europe? Is there a state pension available in another country?

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Dumbo
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Re: Parents close to retirement

Post by Dumbo » Tue Oct 08, 2013 7:36 am

Sorry PaddyMac, I misread you.

I'm not sure what kind of retirement structure they have back home. The family was well off before the war, but after the war the currency became worthless and the money just disappeared. They had good jobs too so I think they would have received good benefits, I'm not sure that they would receive much anymore. Government healthcare is free and they'd have an option to visit private doctors and pay out of pocket for that. My understanding is that it's not very expensive at all since they commonly go back for things like dental work etc.

As far as working until mid or upper 60's, I don't think they want to do that. Each time I've spoken they're looking forward to 62 or whatnot. Their jobs are not easy and they work hard, so the fact that they started with nothing 13 years ago and have a nearly paid off house and some money in the bank makes me pretty proud and motivated to do a lot better than that. I think they're just looking forward to being done.
Those people who think they know everything are a great annoyance to those of us who do. - Isaac Asimov

dickenjb
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Re: Parents close to retirement

Post by dickenjb » Tue Oct 08, 2013 8:00 am

Dumbo wrote:I don't know about their social security payments and how that breaks out for them. We've only been in the country for 13 years and I seem to recall that your SS payments are calculated based on last 20 years of income, which they won't fully have at their retirement age. Not sure if that has an impact or not.
Try highest 35 years of indexed earnings, not last 20 of nominal earnings.

They should go to SSA site and find out what their benefits will be. Don't guess at this one.

JW-Retired
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Re: Parents close to retirement

Post by JW-Retired » Tue Oct 08, 2013 8:40 am

Dumbo wrote:I don't know about their social security payments and how that breaks out for them. We've only been in the country for 13 years and I seem to recall that your SS payments are calculated based on last 20 years of income, which they won't fully have at their retirement age. Not sure if that has an impact or not.

I didn't realize social security benefits can be treated as taxable income. I'll have to pass this info on to my parents.

My parents are pretty cheap so they don't spend too frivolously, which is how I became a boglehead, hehe. I know they'll splurge on certain things once in a while. They spend no money then they drop 10 grand on a vacation. I'm much more by the book budget but my parents never had a set budget like I do. My mom was a bookkeeper in her past life so she maintains pretty good books and my dad is self employed. I think I'd need to set them up in Mint or Quicken to figure out how much they're spending and where it's going into.
SS payments are calculated based on an average (inflation adjusted) of the highest 35 years of income up to a maximum. There are weighting factors in the formula for various income tiers. If you have much less than 35 years then a bunch of zeros are averaged into the formula for the missing years. 13+7=20 years is not going to result in large SS payments. I would get estimates of what these payments will amount to if they retire at 62 versus later at 66 or 70. Also verify what dad's SS earnings record is. As self employed, the FICA earnings they have been reporting and FICA tax paid is their responsibility.

I would not worry much about taxes on SS payments since the amount of SS that's taxed is based on how much other income you have in retirement. If you have only SS payments there will be no tax. It's another complex formula but basically they would need to have additional taxable income (like investment earnings or IRA withdrawals) beyond 50% of the SS income before any SS would start to become taxable.
JW
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