Helping parents retire

[landonew]

Hey everybody,

My question concerns helping my parents retire. My situtation is somewhat unique.

My parents are currently in there mid 50s (54 & 56 too be exact). They were financially stable until around 3-4 years ago when my father "retired" early and started day-trading. Long story short, he lost their savings and they declared bankruptcy and lost their house to foreclosure. Right now, they have both re-entered the work force but aren't doing much in the form of retirement savings. My mom makes around 35-40K a year, and my father's income is entirely dependent upon commission but lets say 2 grand a month.

I would like to take steps to help them retire. My first priority is to help my mother get out of the work force. Fortunately, I believe that I am in a position to do that. I am 24 and recently graduated from law school and will start a new job in march after I take the bar. The job pays around $120K/year. I do, however, have around 150K worth of student loans.

I am currently living with my parents while studying for the bar, and figured I could continue to do this for a couple years or so to keep expenses down and pay off my student loans, so say I could live $1500/month or around $20 grand a year. Here are my projected annual expenses assuming no car-payment/no-housing-costs.

$20,000 personal expenses (food, gas, ext)
$25,000 income tax liability (considering deductions for student loans)
$21,500 401K + IRA (own retirement savings)
-----------------------------
= $66,500

I have omitted my personal health insurence costs because I don't know what they will be, but round it up to $70K.

So I figure to have $55,000 ($125k-$70K) annual investment capital.

Assuming I can refinance my student loans at a reasonable interest rate 6.8%, I figure my minimum monthyly payment would be around $1000/month.

Question #1: How should I structure my plan?

Option 1: Pay back student loans ASAP, then focus on parent's retirement.
Option 2: Make minimum payments, and sock away money in semi-liquid investment medium to accomplish parents retirement.
Option 3: Somewhere in between



Option 2: What is the best way to Help my parents?

1) Obviously, lowering their expenses by eliminating their rental expense would be a good start. I was thinking that purchasing a house in a decent neighborhood (say $150,000) would be the first step. Of course I would keep it in my name to for tax purposes (i.e. avoid gift tax, income tax deductions ext.), but probably give them a "life estate" or something of that nature.

2) Next, I would look into some income producing investment. I figure $3K/month or so would be a good start. It may not allow them both to retire, but I figure it would at least allow my mom to get out of the work-force. I have thought of several ways to accomplish this

• Buy 4-5 residential rental properties and pay off the notes aggressively.
• Commercial Real Estate- say a strip mall or something of that nature.

The good thing about these investments is that they would provide income for my parents during their retirement, but hopefully appreciate at the same time and thus allow me to recognize some return on my own investment.

Any thoughts, tips, or advice is appreciated.

[Coach]

hi landonew, and welcome to the forum!

Yours was a very interesting post. I don't recall ever seeing a post from a child so willing to take on the responsibility of funding his/her parents' retirement.

I have no advice, but a question. Why are you so anxious to get your Mother out of the work force? She's making a significant contribution to the family income, and can provide a lot of help to get them to the point of being able to retire.

I'll understand if there is something you don't want to discuss, but I am very curious.

Coach

[Bestwifeever]

I would be flabbergasted if one of my kids offered to help me retire. As Coach said about your mother, why are you so anxious to help them? They have ten years til typical retirement age and can save a lot during this time--perhaps that is what your mother's income is for. Perhaps they prefer renting. And there's an old saying, no good deed goes unpunished.

I would worry about myself if I were you, and I mean that kindly. You do not owe them anything and the best thing you can do for them is to be happy and as successful in your career as you want to be. Don't encumber your own financial situation by working on theirs--you may have a spouse and children one day and your efforts should go toward them imho.

They are lucky to have a child who loves them so much, at any rate!

[lucija]

landonew - I commend you for trying to help your parents, but be careful not to get carried away to far. The most important thing you can do it to make sure that under no circumstances you will ever be a burden for them -- that means taking care of your (financial) needs first. Also, keep in mind that although it may be a tough cookie to swallow, both of your parents (unless they have severe health issues) must continue working for another 10+ yrs at least or until full SS kicks in...

Have they asked for help? Would they even accept the help from you? If you help them, how can you make sure your dad will not "gamble" it away again?

If you decide to help them out, if I was you, I would max out the 401(k) plan and then split the remaining dollars as follows: 1/2 to pay down the loan (assuming this is more than min payment) and 1/2 towards a down payment for a home where your and your parents will live. I am assuming 1/2 would be sufficient to cover mortgage/insurance/RE tax once you save enough for a down payment and end up buying a place. Regardless, get rid of your loan ASAP.

I would not do any direct retirement savings for them, nor would I set up an income stream for them. I would, however, for the time being pay all the bills. This will give them a chance to save more and get them on their feet faster. I would also make sure they do not take advantage of your help --- last thing you want to do is become an economic crutch for them. If that happens you will not be doing them a favor (as they will never bounce back and become independent) and they will heavily depend on you forever.

Some other thoughts, in no particular order:
+ are you sure you can deduct student loan interest (there used to be an income cut-off, if that is still the case, you fall well above it)?
+ your cited tax liability seems low... did you include SS/medicare/state tax (if any)?
+ $1500/mo in personal expenses seems a bit high, but I don't know your circumstances
+ whatever you do, you should work with your mom to help her take a more active role in finances (to avoid being blind-sided again)

[REWahoo]

Quote:

Originally Posted by landonew What is the best way to Help my parents? 1) Obviously, lowering their expenses by eliminating their rental expense would be a good start. I was thinking that purchasing a house in a decent neighborhood (say $150,000) would be the first step. Of course I would keep it in my name to for tax purposes (i.e. avoid gift tax, income tax deductions ext.), but probably give them a "life estate" or something of that nature.

I would say the idea above should definitely be your first priority. If you can provide them with a roof over their head at no cost (and the three of you can peacefully co-exist) then that will go a long way towards improving their retirement prospects.

Although it isn't the way things are done in the US today, having parents and grandparents living under one roof has thousands of years of history behind it. Assuming they never save another cent towards retirement, they should be able to eventually support themselves on SS alone if they can continue to live with you.

As to your second question regarding income producing investments, I'd recommend you focus on passing the bar, finding a job, paying off your student loans and building up a healthy emergency fund (enough cash to meet a year of your expenses) before you even begin thinking seriously about other types of money making opportunities.

And while what you are doing is admirable and something I'd hope most children would like to do for their parents, be careful the mistakes of your father don't drag you down financially as well. You can't help your parents if your efforts to support them result in investment losses or a mountain of personal debt.

Be good but be careful...

[Lusitan]

Quote:

Originally Posted by landonew 1) Obviously, lowering their expenses by eliminating their rental expense would be a good start. I was thinking that purchasing a house in a decent neighborhood (say $150,000) would be the first step. Of course I would keep it in my name to for tax purposes (i.e. avoid gift tax, income tax deductions ext.), but probably give them a "life estate" or something of that nature.

Why give them a life estate (or any legal rights to the house)? Is there a tax benefit to you for doing so? If not, wouldn't it be better for you to just own the house outright and let them live in it rent-free at your discretion? It would also provide you with flexibility if -- for whatever reason -- you needed to change this arrangement in the future.

As to your overall goal and other ideas, I think it's admirable. But I also think you run the risk of putting your parents on "economic outpatient support" (as described in The Millionaire Next Door), where you will continue to pay for their mistakes and they will not learn to truly manage their finances on their own.

As a last resort, if you're willing to take in aging parents under your own roof at some point down the road, that's already a nice safety net for them.

[landonew]

Quote:

Originally Posted by Coach hi landonew, and welcome to the forum! Yours was a very interesting post. I don't recall ever seeing a post from a child so willing to take on the responsibility of funding his/her parents' retirement. I have no advice, but a question. Why are you so anxious to get your Mother out of the work force? She's making a significant contribution to the family income, and can provide a lot of help to get them to the point of being able to retire. I'll understand if there is something you don't want to discuss, but I am very curious. Coach

Unfortunately, my mother must work two jobs in order to make that sort of income. She works seven days a week, and often times multiple shifts on thursday and friday nights. I didn't mean immediately out of the work force. I was suggesting that she is able to retire in early-mid 60s.

The reason is that I feel as if she is not responsible for the situation. My parents, at one time, where somewhat well off (over a $1million in assets including 401k and home equity). It bothers me that she had to reenter the work force because of my father's poor decision making.

[landonew]

Quote:

Originally Posted by Bestwifeever I would be flabbergasted if one of my kids offered to help me retire. As Coach said about your mother, why are you so anxious to help them? They have ten years til typical retirement age and can save a lot during this time--perhaps that is what your mother's income is for. Perhaps they prefer renting. And there's an old saying, no good deed goes unpunished. I would worry about myself if I were you, and I mean that kindly. You do not owe them anything and the best thing you can do for them is to be happy and as successful in your career as you want to be. Don't encumber your own financial situation by working on theirs--you may have a spouse and children one day and your efforts should go toward them imho. They are lucky to have a child who loves them so much, at any rate!

Thanks for the advice. This makes quite a bit of sense. If there is a time in which i can help them, however, it is now. I have zero obligations (aside from the student loans) and I feel as if these contributions would not be possible if I had a wife and kids.

I agree, once I have a family of my own, they will take priority.

[landonew]

Quote:

Originally Posted by lucija landonew - I commend you for trying to help your parents, but be careful not to get carried away to far. The most important thing you can do it to make sure that under no circumstances you will ever be a burden for them -- that means taking care of your (financial) needs first. Also, keep in mind that although it may be a tough cookie to swallow, both of your parents (unless they have severe health issues) must continue working for another 10+ yrs at least or until full SS kicks in... Have they asked for help? Would they even accept the help from you? If you help them, how can you make sure your dad will not "gamble" it away again? They have not asked, and I have not offered. But, I feel responsible and I do care for them both a great deal. I think at this point, they would accept my help. I would probably structure it in a way to where it appeared as less of a "hand out". For instance, (in the residential home situation) put my father in charge of collecting rents and depositing them in the account and marketing the home to potential tenants. As far as gambling it away... Neither me nor my mother would ever allow him to have any sort of control of the family's finances again. He would have no descretion as far as how the fund where invested, or how they were expended. If you decide to help them out, if I was you, I would max out the 401(k) plan and then split the remaining dollars as follows: 1/2 to pay down the loan (assuming this is more than min payment) and 1/2 towards a down payment for a home where your and your parents will live. I am assuming 1/2 would be sufficient to cover mortgage/insurance/RE tax once you save enough for a down payment and end up buying a place. Regardless, get rid of your loan ASAP. Thanks, this is good advice. I would not do any direct retirement savings for them, nor would I set up an income stream for them. I would, however, for the time being pay all the bills. This will give them a chance to save more and get them on their feet faster. I would also make sure they do not take advantage of your help --- last thing you want to do is become an economic crutch for them. If that happens you will not be doing them a favor (as they will never bounce back and become independent) and they will heavily depend on you forever. This is excellent advice, but they are good people who made bad decisions that have put them into an unfortunate situation. They would never "take advantage" of me in that way. Some other thoughts, in no particular order: + are you sure you can deduct student loan interest (there used to be an income cut-off, if that is still the case, you fall well above it)? + your cited tax liability seems low... did you include SS/medicare/state tax (if any)? + $1500/mo in personal expenses seems a bit high, but I don't know your circumstances + whatever you do, you should work with your mom to help her take a more active role in finances (to avoid being blind-sided again) Your right about the income cut off on the student loans. However, the tax liability was not dramatically effected. http://www.1040.com/site/taxtools/federaltaxestimator/tabid/227/default.aspx Using this calculator my estimated federal tax liability w/o any deductions (other than the standard personal exemption) was around $26,000. TX has no state income tax, so that should be pretty accurate. As far as personal expenses, I play quite a bit of golf (1-2 times a week) and date a fair bit (2-3 a month, nice dinner/ball game ext.) In addition, the professional attire for attorneys can be quite costly. Dry cleaning alone can cost $60 a month. Anyhow, I tried to highball it a little. I don't want to set unrealistic goals.

Thanks for the reply, I tried to address your comments.

[landonew]

Quote:

Originally Posted by Lusitan Why give them a life estate (or any legal rights to the house)? Is there a tax benefit to you for doing so? If not, wouldn't it be better for you to just own the house outright and let them live in it rent-free at your discretion? It would also provide you with flexibility if -- for whatever reason -- you needed to change this arrangement in the future. The idea is to provide them with some legal security in not being at someone else's mercy. I don't want to control them, I want to help them. Honestly, the main reason is to shield my parents from any liability from creditors. If I, for some reason, were to become liable (say malpractice suit that my insurence doesn't cover) I wouldn't want my creditors to be able to access that property. A more likely scenario (not that I plan on having one) would be a divorce in which the spouse attacks my personal property. As to your overall goal and other ideas, I think it's admirable. But I also think you run the risk of putting your parents on "economic outpatient support" (as described in The Millionaire Next Door), where you will continue to pay for their mistakes and they will not learn to truly manage their finances on their own. As a last resort, if you're willing to take in aging parents under your own roof at some point down the road, that's already a nice safety net for them. As for taking them under my own roof, I would be more willing to allow them to live in a house that I owned. While I am single, it is not a problem to live with them for a short period of time (say 1-2 years) so I can get on my feet. However, Once I have my own family I don't believe that I (nor my spouse) would find that to be an acceptable living arrangment. BTW, the economic out-patient care was an excellent point. I enjoyed that book, and possibly now would be a good time to revisit some of the principals he addressed.

Thanks for your comments, I tried to respond.

[landonew]

So if I understand correctly, yall suggest that I

(1) Pay off my own debt
(2) Look into buying a house for them to live in rent free
(3) Reduce their expenses so as to allow them to divert their own income into tax-exempt qualified savings accounts (i.e. roth IRA, 401k ext.).


It also seems that yall think that establishing income producing property would be a mistake. Can yall elaborate on why you feel this way?

I guess anything that increases my tax liability would not be good, but I would set up a trust with them as benificaries. This should shield that income from my personal liability. Any opinions are appreciated.

[lucija]

landonew - it sounds like your head and your heart are in the right place. Your parents are lucky to have you. Good luck to you and your parents!

btw - I glanced at the link for tax computation; I am not a tax pro, but it does not look like it accounts for the payroll tax (SS + medicare).

[Lusitan]

You raise some good points. I'd add into consideration the fact that your parents might get divorced (and possibly remarried), and the possible complications that would arise from them having a life estate to your house. All in all, I guess for your sake I'd be more comfortable if you just kept control of your assets, because you are young and I think it's important for you to have flexibility.

And as far as control goes, well, you are in effect buying them a house, so I'm not sure why your retaining control over it would cause any friction. I would think they would be grateful no matter what.

I'm married with a young child (and possibly more on the way) and honestly, I think I'm more open to some sort of multi-generational living than before. Like one of those houses with a built-in apartment (I think they call them "mother-in-law suites", no?)

At least you'd get a free, on-site, dependable, and happy-to-help "baby sitter" whenever you needed. But of course, I have great in-laws, and I know that's the real kicker for most people!

[plex]

I found this thread interesting, since I had mulled over helping my parents as well. They took care of me very well, are in their early 60s and were very close to retirement until the recent turbulence in the market.

But, I decided it just wouldn't work, for a number of reasons.

1) My parents are pretty independent, and I am pretty sure that they would not be entirely happy being offered economic support, at the very least, I know it wouldn't make them feel very good about themselves.

2) Law students loans are expensive, and just like almost all law students, I have some. 6.8% is not a "good" rate. Anything over 6% is a pretty bad rate really, you can't recover from that level of interest, even by putting money in the stock market, it needs to be settled as quickly as possible.

3) Law is an unstable field in general, some disciplines are doing fine, but for the most part, the legal field is at about a 20-year (or worse) hiring low. Employment is not stable, especially for those who are just now entering. As such, I would be very concerned about having 1 years worth of expenses. (This is the most important one). Being out of work for a number of months could be entirely possible, so having big fixed expenses could lead to major trouble (deep debt/bankruptcy).

4) Law loans may not be deductible, the lower 6 figure range is when that deduction starts to phase out.

[REWahoo]

Quote:

Originally Posted by landonew So if I understand correctly, yall suggest that I (1) Pay off my own debt (2) Look into buying a house for them to live in rent free (3) Reduce their expenses so as to allow them to divert their own income into tax-exempt qualified savings accounts (i.e. roth IRA, 401k ext.).

Yes, but I'd strongly suggest a modification to the first point:

(1) Pay off my own debt while building an emergency fund

Too many people, especially those just starting out, overlook this very critical point. In the current financial mess, those are some of the folks suffering the worst - imagine a sudden job loss with no cushion to pay the bills for the next few months.

[FIREd]

Hi Landonew,

This is a sad story indeed.

Personally, I would first focus on repaying the student loan because 6.8% is a pretty high interest rate IMO. It could take 3-4 years to pay off those loans and build a decent emergency fund. Then, I would start looking at ways to help my parents.

Purchasing a home for your parents would be a great idea (though I will let others discuss the possible tax/estate implications). Nothing can make you feel more secure than a home. As far as providing them with some income, I think that your parents have to find ways to reduce their expenses. With no rent to pay (and I assume you'll also pay for home insurance and property taxes since the house will be in your name), there is really no reason for them to spend close to $3,000 a month. I think that, in your situation, I would expect them to make due on SS when it kicks in and continue working until then.

In the meantime, since you are still living at home, you could help them financially by paying a rent. That way they won't feel like you are giving them a handout but it might be enough extra-income for your mom to slow down a bit.

I know you feel it's unfair for your mom to go back to work. But, since she hasn't left your father over this debacle, it looks like she is standing by her man and willing to do whatever it takes to get the both of them out of the hole. She seems like a brave woman.

[landonew]

Quote:

Originally Posted by REWahoo Yes, but I'd strongly suggest a modification to the first point: (1) Pay off my own debt while building an emergency fund Too many people, especially those just starting out, overlook this very critical point. In the current financial mess, those are some of the folks suffering the worst - imagine a sudden job loss with no cushion to pay the bills for the next few months.

How much would you suggest? 6 months-worth? more?

[REWahoo]

Quote:

Originally Posted by landonew How much would you suggest? 6 months-worth? more?

Start with a goal of 3 months and work it up to a year - as I said in my earlier post:

Quote:

Originally Posted by REWahoo As to your second question regarding income producing investments, I'd recommend you focus on passing the bar, finding a job, paying off your student loans and building up a healthy emergency fund (enough cash to meet a year of your expenses) before you even begin thinking seriously about other types of money making opportunities.

[landonew]

Quote:

Originally Posted by FIREdreamer Hi Landonew, This is a sad story indeed. Personally, I would first focus on repaying the student loan because 6.8% is a pretty high interest rate IMO. It could take 3-4 years to pay off those loans and build a decent emergency fund. Then, I would start looking at ways to help my parents. Purchasing a home for your parents would be a great idea (though I will let others discuss the possible tax/estate implications). Nothing can make you feel more secure than a home. As far as providing them with some income, I think that your parents have to find ways to reduce their expenses. With no rent to pay (and I assume you'll also pay for home insurance and property taxes since the house will be in your name), there is really no reason for them to spend close to $3,000 a month. I think that, in your situation, I would expect them to make due on SS when it kicks in and continue working until then. In the meantime, since you are still living at home, you could help them financially by paying a rent. That way they won't feel like you are giving them a handout but it might be enough extra-income for your mom to slow down a bit. I know you feel it's unfair for your mom to go back to work. But, since she hasn't left your father over this debacle, it looks like she is standing by her man and willing to do whatever it takes to get the both of them out of the hole. She seems like a brave woman.

Thanks for the kind words. I think I will take this advice. Perhaps this is a good example of the "less is more" axiom.

[Urchina]

landonew,

Wow. What a story. I think other posters have given good advice above.

As far as purchasing a property goes, you might want to consider a duplex. You could live on one side, your parents on the other. If you later decided to move out, you could rent out your side. It might work nicely, especially if you're in a nice area.

Good luck with the rest of it.