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Parents-in-law in their 60s
Old 12-07-2010, 12:16 PM   #1
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Parents-in-law in their 60s

Hi,

I wanted to get your feedback on on this situation.

My parents-in-law (both 61) are currently not working. My FIL is collecting UI and will run out end of next year. They watch our kid while we go to work and we give them $1,000 / month. No other source of income. My FIL is telling me that they need about 3k / month to get by.

In terms of their asset, they have paid off house worth about 280k and 401k of 250k. No debt.

Their plan is to start collecting on SS at age 62 for about $1700 / month and make up any difference with 401k. My FIL is pretty optimistic this 401k will provide enough to cover any shortfall while my MIL is pretty worried.

Based on this, what do you think about their financial situation?

Thanks
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Old 12-07-2010, 12:51 PM   #2
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My 2 cents. They need 36K / year. SS will provide $20,400. A 4% withdrawal on their 250K is 10K. Total income available is $30,400. Looks like a problem
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Old 12-07-2010, 01:07 PM   #3
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I guess you need to have a couple more kids so you can give them a raise but even so your need for child care will end one day and also that income to them.

At least they are young enough for your MIL to get a part time job while your FIL collects unemployment and watches your child. Having their house paid off is huge and maybe your FIL knows their expenses are or could be lower than he lets on, hence his optimism.

Being they are your inlaws, what does your spouse think?
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Old 12-07-2010, 01:32 PM   #4
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possibly look into a reverse mortgage on the house? Set up a spreadsheet with the returns on delaying SS for one or both of them versus costs. Also, the 30,500 doesn't include the 12000 from child care payments you are making - what is the time frame on those?.

$12k from you (for say the next 5 years)
$10k from investments (4% withdrawal)
leaves $14k to provide/year for the next 5 years, and $26k/year after that (no more childcare pay)

What happens if one collects SS and one waits? (I'm 31, I don't know much about the payout requirements)
What about the reverse mortgage options? can that provide $14k? that's 5% of the house value per year - at 61 with survivorship, is that possible? Find someone to give you quotes.

What age fully vests SS for them? Given the penalties for starting early, can you get them to fully vested reasonably? Also, if you fall short, they can always start SS, and then you figure out how to make up the difference from there.
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Old 12-07-2010, 02:02 PM   #5
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Quote:
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My 2 cents. They need 36K / year. SS will provide $20,400. A 4% withdrawal on their 250K is 10K. Total income available is $30,400. Looks like a problem

They also have the $12000 in child care for now so they will make it . I would suggest they look for ways to either trim their costs or bring more money in.
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Old 12-07-2010, 02:52 PM   #6
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FIL is incorrect. They are not OK.

You didn't mention the amount of the UI or how long you plan to employ them with child care work, so I can't answer in detail.

Make a matrix showing all sources of income by year including UI for 2011 and child care for as long as you plan to employ them. Do not include SS. $36k minus that income = the amount they need to earn with jobs until they're 66. That will bring SS up to about $25.5/yr. Add $10k/yr from the 401k and they are approximately at the required $36k.

The bottom line is that mom, dad or both need to find some work to delay SS until they're 66. You can calculate how much work they need based on the UI benefit amount for 2011 and how long you're going to employ them for child care.

I'm sure they wish they could just throw in the cards at this stage, but I don't think it's possible.
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Old 12-07-2010, 02:55 PM   #7
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They also have the $12000 in child care for now so they will make it . I would suggest they look for ways to either trim their costs or bring more money in.
I think you're double counting UI and SS. They get the UI until the end of 2011 and SS after that. They don't get both at the same time.

Drats.......
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Old 12-07-2010, 03:07 PM   #8
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Thanks for the comments.

UI is $1,800 per month and our child care will continue for 2 yrs. When my FIL was initially unemployed, I tried to help with the next job by referring recruiters and helping with resume but I think he just wants to rest. There is that optimism so don't think he sees the urgency to find work. My MIL on the other hand is worried but she doesn't have the qualification or fluent english to find a decent paying job. It's much better time/value wise for my FIL to find a job but he's pretty much checked out.

Looks like they will have a shortfall and ideally it'll be good if they wait until 66 to collect SS. We'll look into reverse mortgage and run some numbers that way. Any other recommendation?

It's good to see analysis from 3rd party point of view. When I was running the analysis, I tend to get sidetrack b/c it involves family....
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Old 12-07-2010, 03:29 PM   #9
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Alright, so for this year, you have a monthly shortfall of $200 ($1kCC+$1800UI) = $2400.

Your father needs to find at least part-time work this year to make up the $2400. Depending on how much he can make, it may also push back the end date for the UI. You're looking to buy time here. Also, the $200/month might be within the range of belt-tightening. Let the savings grow for this year one way or another - if it grows 5%, that's an extra $12.5k you'll have to work with in the future.

Glancing at the AARP reverse mortgage calc, you can get at least $100k line of credit. Honestly, I wouldn't necessarily suggest this to your parents until your dad has tried for the part-time job, but it looks like you may be able to borrow against the house to fill the financial gap from 62-66 (end of UI to start of max SS)

Gap = ($36k-.004x$262,500(assumed 5% growth for one year))x4-($12k(one extra year child care)) = $90,000

You might make it, but it'll be a nail-biter.

I don't know what you can do, but FIL needs to find something to bring in a little money. When all you need is minimum wage part-time, there are jobs that probably don't suck as badly. Play Santa? Crossing Guard? Dog walker? get a newspaper route? Shelve books in a library?

Regardless, there isn't much in the way of safety net there, but with some luck they might be able to squeak by to SS. After that, it's SS ($25,500)+.04x262,500(inflating with time for both) = $36k exactly. Again, no room for errors. It's not pretty, but it might make do.
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Old 12-07-2010, 03:34 PM   #10
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Here's another perspective on the numbers. Suppose that they don't start SS until 70.

For 8 years (96) months before then they draw down their $280k at the rate of $3k per month. Allowing for inflation, that will probably exhaust it (3x96=288). Then, at age 70, they start SS which happens to be $1,700 x 1.33 x 1.32 = $2,991/mo. So they exactly hit their target spending.

This may tell your FIL that he's in fine shape, and your MIL that it's too close for comfort, but at least it avoids the mystery of the 4% rule.

Your FIL may be less concerned because he figures he could get a part time job if he really felt he needed one, kind of betting on his future health. (And, is there any health insurance in the $3k?)
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Old 12-07-2010, 03:37 PM   #11
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DO they have health insurance until age 65-Medicare?
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Old 12-07-2010, 04:10 PM   #12
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Maybe they could put up some fliers and advertise baby sitting/day care to pull in some extra money.
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Old 12-07-2010, 05:44 PM   #13
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Quote:
Originally Posted by HatePayingTaxes View Post
Hi,

I wanted to get your feedback on on this situation.

My parents-in-law (both 61) are currently not working. My FIL is collecting UI and will run out end of next year. They watch our kid while we go to work and we give them $1,000 / month. No other source of income. My FIL is telling me that they need about 3k / month to get by.

In terms of their asset, they have paid off house worth about 280k and 401k of 250k. No debt.

Their plan is to start collecting on SS at age 62 for about $1700 / month and make up any difference with 401k. My FIL is pretty optimistic this 401k will provide enough to cover any shortfall while my MIL is pretty worried.

Based on this, what do you think about their financial situation?

Thanks
Invest 100% of the 401K in US goverment treasuries to get inflation protection and eliminate risk which they have no room for error on. Withdrawl of $1300/month from 401K will last 16 years to age 78. At age 78 if still alive start a reverse mortgage. Better be darned disciplined at keeping spending to $3000 per month but if they can stay at that level they have enough money.
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Old 12-07-2010, 05:52 PM   #14
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Worth pointing out, what I was proposing more or less would maintain the 401k value, so there is some slack in drawing it down faster, especially if there is no need to leave an estate, but I'd consider planning on not spending it down and rather consider it for emergencies or to deal with cost creep (and with medical issues, those can crop up in a hurry).
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Old 12-07-2010, 06:00 PM   #15
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They could annuitize the $250k (fixed) and get some $17K per year for life on that piece. These annuities are sometimes the right thing for failing retirement scenarios where it's too late to salvage via significant savings and investment.
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Old 12-08-2010, 10:33 AM   #16
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From what I can tell,
Social security covers 55% of monthly expenses
401k about 25%
Falling short so far. But,
Reverse mortgage already mentioned, or just downgrade the house for a very nice lump sum

Not close to perfect, but seems ok to me. Between help from family and one of them working, can wait on social security and take home enough income to cover the shortfalls
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Old 12-08-2010, 11:04 AM   #17
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Any chance they could trim their expenses? 3k a month with a paid off house, where does it go?
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Old 12-08-2010, 11:56 AM   #18
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They do have medical coverage but I think it's going to expire soon. They might have gap in coverage before medicare kicks in.

When my FIL was laid off, I tried to explain to him that he needs to track all his expenses and not just estimates. People tend to understate their expenses so will be good to track everything. No such thing happened... he said he has good handle on his expenses so I just backed off since it involves in-laws. So that is a good question, 3k is an estimated number... might be more or less. They have very small room for error so does worry me that 3k is an estimate.

Years before the lay off, we discussed finances but nothing really was done. They did have huge stock option in the bank and I explained to him that he shouldn't have that big chunk in one basket and that much went down to $0 during the market crash. I was thinking this lay off will be a good opportunity to sit down and go through the details but estimates were thrown around and, with optimism, this discussion lost traction. I guess it's really hard to change people's way of thinking.
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