Sale of elderly parents' home

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2commaBH
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Sale of elderly parents' home

Post by 2commaBH » Sun Jun 23, 2019 10:33 am

My parents are expecting $500k from the sale of their former home. How do you think they should handle the proceeds? Some details:

- DD 82, DM 77. DD has moderate health issues for which he receives treatment.
- They recently bought a new house to be closer to family. That home has a $1m 30y fixed mortgage with an interest rate of 3.5%. Monthly payment of $4500.
- They are now selling their old house and expect around $500k in proceeds.
- EF of $100k
- DD receives $7k/m pension for as long as he is alive and $2k SS.
- $1.1M in 3-fund portfolio, $700k taxable. Roughly 50/50 AA.

They live frugally and are doing well. The big question is obviously the new $1m mortgage. At my parents' age (and with DD's health issues), I'm wondering if they should put the $500k to the new mortgage. On the other hand, they are able to cover the mortgage fine for now, so maybe instead the $500k should go to a mix of EF and fixed income? That keeps them more liquid. They don't really need more income at the moment, though. Easy answer is to just split the $500k up and do some of each, but is that the right answer?

Would appreciate people's thoughts. Thanks in advance!

ETA: Seems like a little confusion - to be clear, my Dad's pension is only for as long as he is alive. If he passes first, my Mom will get his SS only, which is not enough to cover their expenses.
Last edited by 2commaBH on Sun Jun 23, 2019 2:40 pm, edited 1 time in total.

RadAudit
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Re: Sale of elderly parents' home

Post by RadAudit » Sun Jun 23, 2019 10:49 am

There is no right answer; but I prefer....
2commaBH wrote:
Sun Jun 23, 2019 10:33 am
they are able to cover the mortgage fine for now, so maybe instead the $500k should go to a mix of EF and fixed income? That keeps them more liquid. They don't really need more income at the moment, though. Easy answer is to just split the $500k up and do some of each,
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

HomeStretch
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Re: Sale of elderly parents' home

Post by HomeStretch » Sun Jun 23, 2019 10:49 am

I suggest paying down mortgage by $500k if lender will recast mortgage to lower monthly payment. The extra monthly excess cash can then be redirected to their portfolio.

I suggest this because:
1. They have sufficient liquidity as their monthly income covers expenses and the EF looks like it covers at least 12 months of expenses.
2. They have a sufficient portfolio to cover large lumpy expenses like new auto.
3. Portfolio is invested 50-50 which is not overly conservative. I wouldn’t want them to lose a portion of the $500k to market losses while paying such a large monthly mortgage payment that the survivor might not be able to cover on their own.

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Watty
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Re: Sale of elderly parents' home

Post by Watty » Sun Jun 23, 2019 11:11 am

2commaBH wrote:
Sun Jun 23, 2019 10:33 am
DD receives $7k/m pension for as long as he is alive and $2k SS.
A big question is what will happen to the the pension and Social Security if either of them dies?

If your mom will then get a reduced, or no pension that could be a big problem.

One option that people sometimes don't know about is that they can contact their mortage lender and ask if they will "recast their mortage" (Google this) if they make a large prepayment. They are not required to do this but they usually will for just a couple of hundred dollar processing fee. They way this works is if they pay the loan down by 50%(or whatever makes sense) then the required monthly mortage payment will be reduced by the same percentage. The length of the loan and the interest rate stay the same.

One big problem with their current situation is that even though it is not exact in many ways a mortage is very much like a negative bond and that affects their overall asset allocation. When you look at it this way their situation would be somthing like;

1) EF $100K, bonds
2) Portfolio $550K stocks, $550K bonds
3) Mortgage -$1 million bonds

Added together that is -$350K bonds and $550 stocks which is an asset allocation of

-175% bonds, 275% stocks

Which is way more aggressive than the 50/50 that you mentioned. Again the "mortage as a negative bond" is not exact but if they had a paid off house and were thinking of taking out a new mortage just to invest that money then that would sound scarcely aggressive.

One problem with trying to invest the $500K is that with a 50/50 asset allocation they would be using $250K of that to buy bonds that might be paying 2.5% before taxes, or around 2% after taxes. That is hard to justify when you have a mortage at 3.5%.

I would just use that $500K to recast the mortage if they can. If they can't do that then I would just pay it down.
2commaBH wrote:
Sun Jun 23, 2019 10:33 am
$1.1M in 3-fund portfolio, $700k taxable. Roughly 50/50 AA.
Another big question is how much it would cost in capital gains taxes to free up another $500K from the taxable account. If that is not a lot then I would take a hard look at just paying off the mortage altogether.

If that does not make sense then they could set the dividends in the taxable account to not automatically be reinvested. They could then use that to pay their expenses or to help pay down the mortage.

fru-gal
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Re: Sale of elderly parents' home

Post by fru-gal » Sun Jun 23, 2019 11:15 am

Why did they buy a $1 mil house? Are they in an extremely high cost of living area?

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Nate79
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Re: Sale of elderly parents' home

Post by Nate79 » Sun Jun 23, 2019 1:16 pm

Wow that is an expensive home that neither their assets nor pensions could justify. I would put the money towards the mortgage and maybe look at a recast but I really hope that pension doesnt go away with death.

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Stinky
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Re: Sale of elderly parents' home

Post by Stinky » Sun Jun 23, 2019 1:28 pm

This is a scary situation, unless pension goes on until both have passed away.

Have they already closed on the new house? If not, I would strongly consider backing out of purchase, even if it costs them a little, and either buying a cheaper house or condo, or maybe renting.
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2commaBH
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Re: Sale of elderly parents' home

Post by 2commaBH » Sun Jun 23, 2019 2:35 pm

HomeStretch wrote:
Sun Jun 23, 2019 10:49 am
I suggest paying down mortgage by $500k if lender will recast mortgage to lower monthly payment. The extra monthly excess cash can then be redirected to their portfolio.
Thank you. Lender will recast for a nominal fee ($150). Would you then allocate the extra monthly excess cash 50/50? It will have to go in taxable.

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2commaBH
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Re: Sale of elderly parents' home

Post by 2commaBH » Sun Jun 23, 2019 2:37 pm

fru-gal wrote:
Sun Jun 23, 2019 11:15 am
Why did they buy a $1 mil house? Are they in an extremely high cost of living area?
They actually bought a $1.5M house, with a $1M mortgage. They did so to be closer to family (me). I am in a VHCOL, they are adjacent to that in a HCOL.

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Watty
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Re: Sale of elderly parents' home

Post by Watty » Sun Jun 23, 2019 2:42 pm

I agree that having that expensive of a house is not ideal but as long as there is a lot of home equity they may be able to get a reverse mortage if it is needed. The OPs location is listed as "SFBA" which I assume is the San Francisco Bay area so a million dollar+ home may not be all that fancy.

Sometimes when dealing with elderly parents you need to compromise with a less than ideal solution.
2commaBH wrote:
Sun Jun 23, 2019 2:35 pm
Thank you. Lender will recast for a nominal fee ($150). Would you then allocate the extra monthly excess cash 50/50? It will have to go in taxable.


A lot depends on what happens with the Pension and Social Security if one of them dies.

Goal33
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Re: Sale of elderly parents' home

Post by Goal33 » Sun Jun 23, 2019 2:42 pm

OP, if you have you addressed the survivorship pension, I missed it. That’s the real question here.
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delamer
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Re: Sale of elderly parents' home

Post by delamer » Sun Jun 23, 2019 2:50 pm

2commaBH wrote:
Sun Jun 23, 2019 2:35 pm
HomeStretch wrote:
Sun Jun 23, 2019 10:49 am
I suggest paying down mortgage by $500k if lender will recast mortgage to lower monthly payment. The extra monthly excess cash can then be redirected to their portfolio.
Thank you. Lender will recast for a nominal fee ($150). Would you then allocate the extra monthly excess cash 50/50? It will have to go in taxable.
The income left for the survivor when, inevitably, one of them predeceases the other is an important factor.

That $500,000 will finance over 9 years of mortgage payments.

If the surviving partner will take a big hit in their pension/Social Security income, then keep money in a taxable account rather than recasting. Maybe keep a couple years of payments in cash and invest the rest 50/50.

JGoneRiding
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Re: Sale of elderly parents' home

Post by JGoneRiding » Sun Jun 23, 2019 2:57 pm

2commaBH wrote:
Sun Jun 23, 2019 2:37 pm
fru-gal wrote:
Sun Jun 23, 2019 11:15 am
Why did they buy a $1 mil house? Are they in an extremely high cost of living area?
They actually bought a $1.5M house, with a $1M mortgage. They did so to be closer to family (me). I am in a VHCOL, they are adjacent to that in a HCOL.
So what is the plan of dd passes first? At that point your mom can't afford a 1.5 mil house. Is she going to sell and move in with you? Move to assisted living?

I think trying up a large chunk if assets in an illiquid asset that has protections if when she can't pay is a terrible idea. I would set it aside for future needs when dd passes ar some point they will have to sell the house.

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2commaBH
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Re: Sale of elderly parents' home

Post by 2commaBH » Sun Jun 23, 2019 2:58 pm

Watty wrote:
Sun Jun 23, 2019 11:11 am
2commaBH wrote:
Sun Jun 23, 2019 10:33 am
DD receives $7k/m pension for as long as he is alive and $2k SS.
A big question is what will happen to the the pension and Social Security if either of them dies?

If your mom will then get a reduced, or no pension that could be a big problem.

One option that people sometimes don't know about is that they can contact their mortage lender and ask if they will "recast their mortage" (Google this) if they make a large prepayment. They are not required to do this but they usually will for just a couple of hundred dollar processing fee. They way this works is if they pay the loan down by 50%(or whatever makes sense) then the required monthly mortage payment will be reduced by the same percentage. The length of the loan and the interest rate stay the same.

One big problem with their current situation is that even though it is not exact in many ways a mortage is very much like a negative bond and that affects their overall asset allocation. When you look at it this way their situation would be somthing like;

1) EF $100K, bonds
2) Portfolio $550K stocks, $550K bonds
3) Mortgage -$1 million bonds

Added together that is -$350K bonds and $550 stocks which is an asset allocation of

-175% bonds, 275% stocks

Which is way more aggressive than the 50/50 that you mentioned. Again the "mortage as a negative bond" is not exact but if they had a paid off house and were thinking of taking out a new mortage just to invest that money then that would sound scarcely aggressive.

One problem with trying to invest the $500K is that with a 50/50 asset allocation they would be using $250K of that to buy bonds that might be paying 2.5% before taxes, or around 2% after taxes. That is hard to justify when you have a mortage at 3.5%.

I would just use that $500K to recast the mortage if they can. If they can't do that then I would just pay it down.
2commaBH wrote:
Sun Jun 23, 2019 10:33 am
$1.1M in 3-fund portfolio, $700k taxable. Roughly 50/50 AA.
Another big question is how much it would cost in capital gains taxes to free up another $500K from the taxable account. If that is not a lot then I would take a hard look at just paying off the mortage altogether.

If that does not make sense then they could set the dividends in the taxable account to not automatically be reinvested. They could then use that to pay their expenses or to help pay down the mortage.
Thanks for the detailed answer. To answer some of your questions, if my Dad passes, my Mom does not get his pension, only his SS. They can recast for a nominal fee ($150). And they do have a decent chunk of their taxable account ($350k) with minimal capital gains.

I'm familiar with recasts and am curious why that would be your preference. They don't really need the cashflow while my Dad is alive, do they?

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2commaBH
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Re: Sale of elderly parents' home

Post by 2commaBH » Sun Jun 23, 2019 3:03 pm

Watty wrote:
Sun Jun 23, 2019 2:42 pm
I agree that having that expensive of a house is not ideal but as long as there is a lot of home equity they may be able to get a reverse mortage if it is needed. The OPs location is listed as "SFBA" which I assume is the San Francisco Bay area so a million dollar+ home may not be all that fancy.
I have to say I'm a little surprised everyone is so scared about the new house. Yes, it is in the San Francisco Bay Area and is in a HCOL that was as close as they could get to my VHCOL house with a standard of living they could handle. The house was bought for $1.5M last year, with $500k down and the rest in the mortgage. The intention was always to put some or all of the old home proceeds to the new house mortgage, which will take it to roughly 33% LTV if we go that way.

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2commaBH
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Re: Sale of elderly parents' home

Post by 2commaBH » Sun Jun 23, 2019 3:04 pm

Goal33 wrote:
Sun Jun 23, 2019 2:42 pm
OP, if you have you addressed the survivorship pension, I missed it. That’s the real question here.
Yes - sorry about that, I edited the original post to reflect the answer as well. The pension does not survive my Dad, if he passes first.

delamer
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Re: Sale of elderly parents' home

Post by delamer » Sun Jun 23, 2019 3:08 pm

2commaBH wrote:
Sun Jun 23, 2019 2:58 pm
Watty wrote:
Sun Jun 23, 2019 11:11 am
2commaBH wrote:
Sun Jun 23, 2019 10:33 am
DD receives $7k/m pension for as long as he is alive and $2k SS.
A big question is what will happen to the the pension and Social Security if either of them dies?

If your mom will then get a reduced, or no pension that could be a big problem.

One option that people sometimes don't know about is that they can contact their mortage lender and ask if they will "recast their mortage" (Google this) if they make a large prepayment. They are not required to do this but they usually will for just a couple of hundred dollar processing fee. They way this works is if they pay the loan down by 50%(or whatever makes sense) then the required monthly mortage payment will be reduced by the same percentage. The length of the loan and the interest rate stay the same.

One big problem with their current situation is that even though it is not exact in many ways a mortage is very much like a negative bond and that affects their overall asset allocation. When you look at it this way their situation would be somthing like;

1) EF $100K, bonds
2) Portfolio $550K stocks, $550K bonds
3) Mortgage -$1 million bonds

Added together that is -$350K bonds and $550 stocks which is an asset allocation of

-175% bonds, 275% stocks

Which is way more aggressive than the 50/50 that you mentioned. Again the "mortage as a negative bond" is not exact but if they had a paid off house and were thinking of taking out a new mortage just to invest that money then that would sound scarcely aggressive.

One problem with trying to invest the $500K is that with a 50/50 asset allocation they would be using $250K of that to buy bonds that might be paying 2.5% before taxes, or around 2% after taxes. That is hard to justify when you have a mortage at 3.5%.

I would just use that $500K to recast the mortage if they can. If they can't do that then I would just pay it down.
2commaBH wrote:
Sun Jun 23, 2019 10:33 am
$1.1M in 3-fund portfolio, $700k taxable. Roughly 50/50 AA.
Another big question is how much it would cost in capital gains taxes to free up another $500K from the taxable account. If that is not a lot then I would take a hard look at just paying off the mortage altogether.

If that does not make sense then they could set the dividends in the taxable account to not automatically be reinvested. They could then use that to pay their expenses or to help pay down the mortage.
Thanks for the detailed answer. To answer some of your questions, if my Dad passes, my Mom does not get his pension, only his SS. They can recast for a nominal fee ($150). And they do have a decent chunk of their taxable account ($350k) with minimal capital gains.

I'm familiar with recasts and am curious why that would be your preference. They don't really need the cashflow while my Dad is alive, do they?
Your mother’s income will fall from $9,000/month to $2,000/month if your father dies first?

According this chart from Social Security, your father’s life expectancy is about 7 years: https://www.ssa.gov/oact/STATS/table4c6.html

There is no way I’d tie up a penny more money in the house.

bayview
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Re: Sale of elderly parents' home

Post by bayview » Sun Jun 23, 2019 3:08 pm

2commaBH wrote:
Sun Jun 23, 2019 3:03 pm
Watty wrote:
Sun Jun 23, 2019 2:42 pm
I agree that having that expensive of a house is not ideal but as long as there is a lot of home equity they may be able to get a reverse mortage if it is needed. The OPs location is listed as "SFBA" which I assume is the San Francisco Bay area so a million dollar+ home may not be all that fancy.
I have to say I'm a little surprised everyone is so scared about the new house. Yes, it is in the San Francisco Bay Area and is in a HCOL that was as close as they could get to my VHCOL house with a standard of living they could handle. The house was bought for $1.5M last year, with $500k down and the rest in the mortgage. The intention was always to put some or all of the old home proceeds to the new house mortgage, which will take it to roughly 33% LTV if we go that way.
Right, and that's a nice amount of equity, but the point is whether your mom could afford to keep it if your dad passes first and she loses his pension income (and SS.) Cash flow is crucial in retirement.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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2commaBH
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Re: Sale of elderly parents' home

Post by 2commaBH » Sun Jun 23, 2019 3:15 pm

JGoneRiding wrote:
Sun Jun 23, 2019 2:57 pm
2commaBH wrote:
Sun Jun 23, 2019 2:37 pm
fru-gal wrote:
Sun Jun 23, 2019 11:15 am
Why did they buy a $1 mil house? Are they in an extremely high cost of living area?
They actually bought a $1.5M house, with a $1M mortgage. They did so to be closer to family (me). I am in a VHCOL, they are adjacent to that in a HCOL.
So what is the plan of dd passes first? At that point your mom can't afford a 1.5 mil house. Is she going to sell and move in with you? Move to assisted living?

I think trying up a large chunk if assets in an illiquid asset that has protections if when she can't pay is a terrible idea. I would set it aside for future needs when dd passes ar some point they will have to sell the house.
Thanks - I think the plan depends a little on we do with this $500k. If we put it to the mortgage and recast, she can probably rely on SS and her RMDs to mostly cover cashflow to stay in the house. If she prefers she can downsize or move in with us and rent the house out. If we keep the $500k somewhere out of the mortgage, she would likely recast with that $500k (and maybe more).

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2commaBH
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Re: Sale of elderly parents' home

Post by 2commaBH » Sun Jun 23, 2019 3:17 pm

Nate79 wrote:
Sun Jun 23, 2019 1:16 pm
Wow that is an expensive home that neither their assets nor pensions could justify. I would put the money towards the mortgage and maybe look at a recast but I really hope that pension doesnt go away with death.
Thank you - the pension does go away at DD's death. I would love to hear more of your thinking on putting the money towards the mortgage now rather than at DD's death. They have enough cashflow now to cover the mortgage.

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2commaBH
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Re: Sale of elderly parents' home

Post by 2commaBH » Sun Jun 23, 2019 3:22 pm

delamer wrote:
Sun Jun 23, 2019 3:08 pm
2commaBH wrote:
Sun Jun 23, 2019 2:58 pm
Watty wrote:
Sun Jun 23, 2019 11:11 am
2commaBH wrote:
Sun Jun 23, 2019 10:33 am
DD receives $7k/m pension for as long as he is alive and $2k SS.
A big question is what will happen to the the pension and Social Security if either of them dies?

If your mom will then get a reduced, or no pension that could be a big problem.

One option that people sometimes don't know about is that they can contact their mortage lender and ask if they will "recast their mortage" (Google this) if they make a large prepayment. They are not required to do this but they usually will for just a couple of hundred dollar processing fee. They way this works is if they pay the loan down by 50%(or whatever makes sense) then the required monthly mortage payment will be reduced by the same percentage. The length of the loan and the interest rate stay the same.

One big problem with their current situation is that even though it is not exact in many ways a mortage is very much like a negative bond and that affects their overall asset allocation. When you look at it this way their situation would be somthing like;

1) EF $100K, bonds
2) Portfolio $550K stocks, $550K bonds
3) Mortgage -$1 million bonds

Added together that is -$350K bonds and $550 stocks which is an asset allocation of

-175% bonds, 275% stocks

Which is way more aggressive than the 50/50 that you mentioned. Again the "mortage as a negative bond" is not exact but if they had a paid off house and were thinking of taking out a new mortage just to invest that money then that would sound scarcely aggressive.

One problem with trying to invest the $500K is that with a 50/50 asset allocation they would be using $250K of that to buy bonds that might be paying 2.5% before taxes, or around 2% after taxes. That is hard to justify when you have a mortage at 3.5%.

I would just use that $500K to recast the mortage if they can. If they can't do that then I would just pay it down.
2commaBH wrote:
Sun Jun 23, 2019 10:33 am
$1.1M in 3-fund portfolio, $700k taxable. Roughly 50/50 AA.
Another big question is how much it would cost in capital gains taxes to free up another $500K from the taxable account. If that is not a lot then I would take a hard look at just paying off the mortage altogether.

If that does not make sense then they could set the dividends in the taxable account to not automatically be reinvested. They could then use that to pay their expenses or to help pay down the mortage.
Thanks for the detailed answer. To answer some of your questions, if my Dad passes, my Mom does not get his pension, only his SS. They can recast for a nominal fee ($150). And they do have a decent chunk of their taxable account ($350k) with minimal capital gains.

I'm familiar with recasts and am curious why that would be your preference. They don't really need the cashflow while my Dad is alive, do they?
Your mother’s income will fall from $9,000/month to $2,000/month if your father dies first?

According this chart from Social Security, your father’s life expectancy is about 7 years: https://www.ssa.gov/oact/STATS/table4c6.html

There is no way I’d tie up a penny more money in the house.
Correct on her income. Would you then put the $500k into a 50/50 allocation? Or something safer?

quantAndHold
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Re: Sale of elderly parents' home

Post by quantAndHold » Sun Jun 23, 2019 3:25 pm

Using the $500k to pay down the mortgage and recast would probably get the PITI down to $3k/month or so. Between the $2k of SS survivors benefit and the $4k/month she can draw from the portfolio, she would be okay. Not rich, but okay.

She could also convert some or all of the portfolio into a SPIA, and unlock some more income. Buying a SPIA isn’t a decision that needs to be made today, but there is an age limit to be aware of.

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2commaBH
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Re: Sale of elderly parents' home

Post by 2commaBH » Sun Jun 23, 2019 3:27 pm

bayview wrote:
Sun Jun 23, 2019 3:08 pm
2commaBH wrote:
Sun Jun 23, 2019 3:03 pm
Watty wrote:
Sun Jun 23, 2019 2:42 pm
I agree that having that expensive of a house is not ideal but as long as there is a lot of home equity they may be able to get a reverse mortage if it is needed. The OPs location is listed as "SFBA" which I assume is the San Francisco Bay area so a million dollar+ home may not be all that fancy.
I have to say I'm a little surprised everyone is so scared about the new house. Yes, it is in the San Francisco Bay Area and is in a HCOL that was as close as they could get to my VHCOL house with a standard of living they could handle. The house was bought for $1.5M last year, with $500k down and the rest in the mortgage. The intention was always to put some or all of the old home proceeds to the new house mortgage, which will take it to roughly 33% LTV if we go that way.
Right, and that's a nice amount of equity, but the point is whether your mom could afford to keep it if your dad passes first and she loses his pension income (and SS.) Cash flow is crucial in retirement.
I think it would be tight, for sure. But she would keep his SS, wouldn't she? The plan would be either to sell at that point or pay the mortgage way down (or off).

Dottie57
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Re: Sale of elderly parents' home

Post by Dottie57 » Sun Jun 23, 2019 3:28 pm

bayview wrote:
Sun Jun 23, 2019 3:08 pm
2commaBH wrote:
Sun Jun 23, 2019 3:03 pm
Watty wrote:
Sun Jun 23, 2019 2:42 pm
I agree that having that expensive of a house is not ideal but as long as there is a lot of home equity they may be able to get a reverse mortage if it is needed. The OPs location is listed as "SFBA" which I assume is the San Francisco Bay area so a million dollar+ home may not be all that fancy.
I have to say I'm a little surprised everyone is so scared about the new house. Yes, it is in the San Francisco Bay Area and is in a HCOL that was as close as they could get to my VHCOL house with a standard of living they could handle. The house was bought for $1.5M last year, with $500k down and the rest in the mortgage. The intention was always to put some or all of the old home proceeds to the new house mortgage, which will take it to roughly 33% LTV if we go that way.
Right, and that's a nice amount of equity, but the point is whether your mom could afford to keep it if your dad passes first and she loses his pension income (and SS.) Cash flow is crucial in retirement.
Agreed. Your mom will be hurting without your dad’s pension. The house will not be affordable.

delamer
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Re: Sale of elderly parents' home

Post by delamer » Sun Jun 23, 2019 3:30 pm

2commaBH wrote:
Sun Jun 23, 2019 3:22 pm
delamer wrote:
Sun Jun 23, 2019 3:08 pm
2commaBH wrote:
Sun Jun 23, 2019 2:58 pm
Watty wrote:
Sun Jun 23, 2019 11:11 am
2commaBH wrote:
Sun Jun 23, 2019 10:33 am
DD receives $7k/m pension for as long as he is alive and $2k SS.
A big question is what will happen to the the pension and Social Security if either of them dies?

If your mom will then get a reduced, or no pension that could be a big problem.

One option that people sometimes don't know about is that they can contact their mortage lender and ask if they will "recast their mortage" (Google this) if they make a large prepayment. They are not required to do this but they usually will for just a couple of hundred dollar processing fee. They way this works is if they pay the loan down by 50%(or whatever makes sense) then the required monthly mortage payment will be reduced by the same percentage. The length of the loan and the interest rate stay the same.

One big problem with their current situation is that even though it is not exact in many ways a mortage is very much like a negative bond and that affects their overall asset allocation. When you look at it this way their situation would be somthing like;

1) EF $100K, bonds
2) Portfolio $550K stocks, $550K bonds
3) Mortgage -$1 million bonds

Added together that is -$350K bonds and $550 stocks which is an asset allocation of

-175% bonds, 275% stocks

Which is way more aggressive than the 50/50 that you mentioned. Again the "mortage as a negative bond" is not exact but if they had a paid off house and were thinking of taking out a new mortage just to invest that money then that would sound scarcely aggressive.

One problem with trying to invest the $500K is that with a 50/50 asset allocation they would be using $250K of that to buy bonds that might be paying 2.5% before taxes, or around 2% after taxes. That is hard to justify when you have a mortage at 3.5%.

I would just use that $500K to recast the mortage if they can. If they can't do that then I would just pay it down.
2commaBH wrote:
Sun Jun 23, 2019 10:33 am
$1.1M in 3-fund portfolio, $700k taxable. Roughly 50/50 AA.
Another big question is how much it would cost in capital gains taxes to free up another $500K from the taxable account. If that is not a lot then I would take a hard look at just paying off the mortage altogether.

If that does not make sense then they could set the dividends in the taxable account to not automatically be reinvested. They could then use that to pay their expenses or to help pay down the mortage.
Thanks for the detailed answer. To answer some of your questions, if my Dad passes, my Mom does not get his pension, only his SS. They can recast for a nominal fee ($150). And they do have a decent chunk of their taxable account ($350k) with minimal capital gains.

I'm familiar with recasts and am curious why that would be your preference. They don't really need the cashflow while my Dad is alive, do they?
Your mother’s income will fall from $9,000/month to $2,000/month if your father dies first?

According this chart from Social Security, your father’s life expectancy is about 7 years: https://www.ssa.gov/oact/STATS/table4c6.html

There is no way I’d tie up a penny more money in the house.
Correct on her income. Would you then put the $500k into a 50/50 allocation? Or something safer?
As I said earlier, I’d put a few years of mortgage payments into cash and then invest the rest 50/50.

That way, she knows she can carry the house for awhile, but gets some growth.

I assume the $4500 includes taxes escrow?

You need to figure out what your mother’s total expenses would be if your father dies first.

Ignoring recasting, her housing expenses will stay the same. Other expenses will likely decline.

Compare that to her income.

It may be as simple as that she will have to sell the house if your father is gone.

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Watty
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Re: Sale of elderly parents' home

Post by Watty » Sun Jun 23, 2019 3:54 pm

2commaBH wrote:
Sun Jun 23, 2019 2:58 pm
I'm familiar with recasts and am curious why that would be your preference. They don't really need the cashflow while my Dad is alive, do they?
Investing the money and getting an after tax investing return that is higher than 3.5% is harder than it sounds because they will have a sequence of returns risk. Here is a very simplistic example that I have posted about that before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
If they do not invest the money then if they are going to pay down the mortage then they might as well do a recast. Even with a recast they can still pay more each month if they want to.
2commaBH wrote:
Sun Jun 23, 2019 2:58 pm
And they do have a decent chunk of their taxable account ($350k) with minimal capital gains.
One other advantage of doing the recast is that they will need less income each year so they may also pay a lot less in taxes.

For example right now with their current $4500 a month mortage payment they need $54K a year after taxes to pay that so they may need something like $70K in income to be able to pay Federal and California income taxes and have $54K left over to pay the mortage. With their pension, SS, dividends, etc they could be getting into the Federal 24% tax bracket and a high California tax bracket, and also have to pay significan IRMMA surcharges on their Medicare.

In contrast if they used the old house funds and that $350K from the taxable account they could end up with a tiny(or no) mortage payment and maybe be in the 12% federal tax bracket and not have to worry about the IRMMA surcharges.

It would be good to do dummy tax returns for several scenarios, including when a survivor files tax returns in the higher single tax brackets.

As others have mentioned the cash flow could be a problem if your dad dies first but even if she starts out entirely paid off the mortage and starts out with $650K in the portfolio and emergency fund she should be OK for a while.

She could also tap the home equity with a reverse mortage if she needs to. Reverse mortgages used to be faily toxic so they got a bad reputation but they revised the rules about ten years ago and while they still have lots of downsides they can make more sense now because the rules are now better.

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Re: Sale of elderly parents' home

Post by ChrisC » Sun Jun 23, 2019 4:23 pm

Not a problem if OP can backstop all potential cash flow issues if DD passes first. :dollar OP's screen name suggests he might have a deep pocket. :moneybag At this stage of his parent's lives, with one having moderate health issues, I 'd be counseling parents to look at CCRCs. What is the plan if health issues go south quickly?

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Re: Sale of elderly parents' home

Post by bayview » Sun Jun 23, 2019 4:53 pm

2commaBH wrote:
Sun Jun 23, 2019 3:27 pm
bayview wrote:
Sun Jun 23, 2019 3:08 pm
2commaBH wrote:
Sun Jun 23, 2019 3:03 pm
Watty wrote:
Sun Jun 23, 2019 2:42 pm
I agree that having that expensive of a house is not ideal but as long as there is a lot of home equity they may be able to get a reverse mortage if it is needed. The OPs location is listed as "SFBA" which I assume is the San Francisco Bay area so a million dollar+ home may not be all that fancy.
I have to say I'm a little surprised everyone is so scared about the new house. Yes, it is in the San Francisco Bay Area and is in a HCOL that was as close as they could get to my VHCOL house with a standard of living they could handle. The house was bought for $1.5M last year, with $500k down and the rest in the mortgage. The intention was always to put some or all of the old home proceeds to the new house mortgage, which will take it to roughly 33% LTV if we go that way.
Right, and that's a nice amount of equity, but the point is whether your mom could afford to keep it if your dad passes first and she loses his pension income (and SS.) Cash flow is crucial in retirement.
I think it would be tight, for sure. But she would keep his SS, wouldn't she? The plan would be either to sell at that point or pay the mortgage way down (or off).
No!

She would get either her own benefit or half his benefit (survivor), whichever is higher. If she’s currently getting half his benefit, that’s all she’ll keep. This is what is so devastating to couples who rely significantly on SS income, and one dies.

— someone please confirm/ correct/ expand on the above; thanks.

eta: thanks to potto for the correction.
Last edited by bayview on Sun Jun 23, 2019 5:27 pm, edited 2 times in total.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

mchampse
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Re: Sale of elderly parents' home

Post by mchampse » Sun Jun 23, 2019 5:17 pm

Does your dad have a life insurance policy? As others have noted, I would sorry about what happens if your dad predecessors your mom which is far more likely than the opposite.

potto0213
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Re: Sale of elderly parents' home

Post by potto0213 » Sun Jun 23, 2019 5:19 pm

<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
No!

She would get either her own benefit or half his benefit (survivor), whichever is higher. If she’s currently getting half his benefit, that’s all she’ll keep. This is what is so devastating to couples who rely significantly on SS income, and one die

<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<

I think you're confusing a survivor benefit wit spousal benefits. A survivor benefit would give her the same amount as her deceased spouse.

bayview
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Re: Sale of elderly parents' home

Post by bayview » Sun Jun 23, 2019 5:24 pm

potto0213 wrote:
Sun Jun 23, 2019 5:19 pm
<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
No!

She would get either her own benefit or half his benefit (survivor), whichever is higher. If she’s currently getting half his benefit, that’s all she’ll keep. This is what is so devastating to couples who rely significantly on SS income, and one die

<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<

I think you're confusing a survivor benefit wit spousal benefits. A survivor benefit would give her the same amount as her deceased spouse.
Thanks for the catch; you’re right, and I knew that. (Senior moment :D )

Nevertheless, many people are caught by surprise when losing one or more income streams when becoming suddenly single. I’d be awfully twitchy with that mortgage note, unless planning to downsize as mentioned (possibly having to sell into a recession/ depression RE market.)
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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Re: Sale of elderly parents' home

Post by Dottie57 » Sun Jun 23, 2019 5:43 pm

Make sure all or part of the 500k is put aside in a safe place so mom can purchase a n SPIA to replace income lost when dad dies.

A drop in income from 108k tp 24k Is pretty dramatic. Your mom deserves to have someone looking out for her.

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Watty
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Re: Sale of elderly parents' home

Post by Watty » Sun Jun 23, 2019 5:59 pm

If the
mchampse wrote:
Sun Jun 23, 2019 5:17 pm
Does your dad have a life insurance policy? As others have noted, I would sorry about what happens if your dad predecessors your mom which is far more likely than the opposite.
She would have a net worth of around $2.2 million dollars.

A lot of it might be in home equity but there are lots of ways to work around that.

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Re: Sale of elderly parents' home

Post by eddot98 » Sun Jun 23, 2019 7:04 pm

Pardon me if I missed a post mentioning this, but at your father’s age I would be very concerned about the possibility that he may end up in a Nursing Home before he passes away. I didn’t see anything about Long Term Care Insurance. Without qualifying for Medicaid, the $130,000 per year that would cost will quickly decimate their wealth. Their house is worth way more than Medicaid would allow the spouse to keep if they did run through their savings. I would suggest some sort of planning regarding possible long term care.

We need to do the same as Alzheimer’s runs in DW’s family. Both of her parents have some sort of Alzheimer’s or dementia and they are in the same nursing home, but they are in their early 90’s. They had almost nothing, didn’t plan, and lost their house and $44,000 of their pensions and Social Security is going directly to the nursing home.

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Re: Sale of elderly parents' home

Post by bearwithbear » Sun Jun 23, 2019 7:11 pm

potto0213.

From Mike PIper's "Social Security Made Simple" page 22 to paraphrase - the widow gets 100% of her husband's PIA since she is past her full retirement age.
Is that what you are saying?

Bear

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Re: Sale of elderly parents' home

Post by ResearchMed » Sun Jun 23, 2019 10:49 pm

bearwithbear wrote:
Sun Jun 23, 2019 7:11 pm
potto0213.

From Mike PIper's "Social Security Made Simple" page 22 to paraphrase - the widow gets 100% of her husband's PIA since she is past her full retirement age.
Is that what you are saying?

Bear
I thought the surviving spouse got the full SS benefits of the deceased spouse (if it is more than the survivor's own benefit). That's the reason - I thought - it can be especially advantageous for the higher earner of a couple to wait until age 70 to claim SS benefits.
If it were just the PIA, then this double advantage would max out at FRA for the higher earner.

RM
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Re: Sale of elderly parents' home

Post by vested1 » Mon Jun 24, 2019 7:48 am

Don't forget property taxes, which in California start out at 1% and are almost guaranteed to increase by 2% of the amount paid the previous year, every year. That would be about 15k in property tax their first year of ownership.

However, if your parents moved from a different location in California, and if the counties they moved to and from allow it, they can transfer their property tax basis from the old house to the new house because of their age. My MIL did this during 2 moves after her husband died, and was paying around $600 a year property taxes on a condo worth $530,000 (about .14% of assessed value) when she died last year at age 94.

My vote would be to use the proceeds of the sale and a good portion of taxable to knock down the mortgage, then ask the bank for a recast. They would then be sitting on an admittedly illiquid asset that has an extremely good possibility of appreciating in value, while lowering the mortgage payment tremendously, or even eliminating it with a larger withdrawal from taxable. It's all about income needed to meet expenses, and factoring in the worst case scenario to cover all bases.

Does your father's previous employer provide any life insurance that could help your mother pay off the mortgage should he pass? If so, they could pay down the mortgage to the amount covered by the life insurance payout.

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Re: Sale of elderly parents' home

Post by stan1 » Mon Jun 24, 2019 10:34 am

Could plan for mom to sell the place when dad passes on, especially if it would be too big for one person. She would be able to afford a nice senior apartment for many years with the companionship of others as well as people to help her out at the level needed. CCRCs are often discussed on this board but frankly she might not have the assets for a CCRC in a VHCOL area. There are plenty of pay as you go senior living options at all price ranges available.

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2commaBH
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Re: Sale of elderly parents' home

Post by 2commaBH » Mon Jun 24, 2019 2:20 pm

quantAndHold wrote:
Sun Jun 23, 2019 3:25 pm
Using the $500k to pay down the mortgage and recast would probably get the PITI down to $3k/month or so. Between the $2k of SS survivors benefit and the $4k/month she can draw from the portfolio, she would be okay. Not rich, but okay.

She could also convert some or all of the portfolio into a SPIA, and unlock some more income. Buying a SPIA isn’t a decision that needs to be made today, but there is an age limit to be aware of.
Thank you - this is an interesting suggestion, and one I hadn't considered.

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Re: Sale of elderly parents' home

Post by 2commaBH » Mon Jun 24, 2019 2:21 pm

mchampse wrote:
Sun Jun 23, 2019 5:17 pm
Does your dad have a life insurance policy? As others have noted, I would sorry about what happens if your dad predecessors your mom which is far more likely than the opposite.
He had a policy that ran out a number of years ago. At his age, a new policy would probably be very expensive.

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Re: Sale of elderly parents' home

Post by 2commaBH » Mon Jun 24, 2019 2:31 pm

Watty wrote:
Sun Jun 23, 2019 3:54 pm
She could also tap the home equity with a reverse mortage if she needs to. Reverse mortgages used to be faily toxic so they got a bad reputation but they revised the rules about ten years ago and while they still have lots of downsides they can make more sense now because the rules are now better.
Thanks - a reverse mortgage is definitely a safety valve if needed, but paying down at 3.5% and then borrowing our equity back at likely higher than that would be tough to swallow.

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Re: Sale of elderly parents' home

Post by 2commaBH » Mon Jun 24, 2019 2:33 pm

stan1 wrote:
Mon Jun 24, 2019 10:34 am
Could plan for mom to sell the place when dad passes on, especially if it would be too big for one person. She would be able to afford a nice senior apartment for many years with the companionship of others as well as people to help her out at the level needed. CCRCs are often discussed on this board but frankly she might not have the assets for a CCRC in a VHCOL area. There are plenty of pay as you go senior living options at all price ranges available.
Thank you. Instead of a CCRC, she would probably just move in with us unless she had medical reasons to be in one. We barely have the space, and if we were selling both our place and hers we could probably afford a setup that was comfortable for all.

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Re: Sale of elderly parents' home

Post by ChrisC » Mon Jun 24, 2019 6:42 pm

2commaBH wrote:
Mon Jun 24, 2019 2:33 pm
stan1 wrote:
Mon Jun 24, 2019 10:34 am
Could plan for mom to sell the place when dad passes on, especially if it would be too big for one person. She would be able to afford a nice senior apartment for many years with the companionship of others as well as people to help her out at the level needed. CCRCs are often discussed on this board but frankly she might not have the assets for a CCRC in a VHCOL area. There are plenty of pay as you go senior living options at all price ranges available.
Thank you. Instead of a CCRC, she would probably just move in with us unless she had medical reasons to be in one. We barely have the space, and if we were selling both our place and hers we could probably afford a setup that was comfortable for all.
My suggestion is to consider a CCRC now, not later,
and as a couple, not when it’s too late healthwise or financially for one of them. It seems to me that right now, even in a VHCOL place they can afford a moderately priced CCRC especially Type B or C contract/business model CCRCs. Moreover, they appear right now to be able to pass independent living and good health criteria most CCRCs have for entrance criteria.

I’ve been looking at one CCRC in my neck of the woods, with entrance fees of $350K to $1.8 million, with an equity business model and Type B/C contract, and I’m sure the OP’s parents have the present financial capability to find a decent place for both of them to age in place before health issues over take them.

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