Parents retiring - need help planning!

[booradley83]

Hi All,

Parents just retired and sold a business which they have owned for decades. Ages 64(dad) and 59(mom).

Ages - 64 and 59
Debts - 0
Primary home - paid off - no mortgage - valued at ~375k (no desire to move or sell)
Required income - $2500-3000 per month based on average spending

Cash from sale of business/savings - $550k (100% parked at Ally for now generating .5% interest)
Dad IRA - $10k - VTI
Dad Roth- $8k -VTI
Dad investment account/taxable - $108k - VTI
Mom IRA- $8k - VTI
Healthcare costs - 0 per month; have medicaid through state (NJ)

They also own a rental valued at $250k which is fully paid off and generating ~$1200 per month net after expenses(taxes, maintenance, vacancy, etc).

Aside from the rental, there is a shortfall of 1500-1800 per month that they require to live on.

Dad is eligible for SSI which would pay out $907 today, $1089 at 66.5, and $1394 at 70. This is the monthly SSI amount. Mom would not be eligible for SSI until 62(about 2.5 years away). Mom would be eligible for SSI amounts of $599 at 62, $851 at 67, and $1055 at 70.

Now that there is no business, they have $550k in cash. Questions:

1. Should dad start collecting SSI right away? Let's assume planning until the age of 95.
2. What percentage of the $550k should be put away for emergency fund?
3. How much of the $550k should be invested in the market? What allocation? Lump sum or dollar cost averaging?
4. With SSI + the rental income, they would have roughly a $400 deficit at the minimum.
5. What would be an optimal strategy to draw-down versus invest?
6. When will mom's SSI come into play? When should she start withdrawing?

Any and all advice greatly appreciated!

 

[pacergal]

One thing that may change is with $550K now as investable asset, they may no longer qualify for medicaid and may need to pay for health care.
As far as budget, taxes and finances, there are many on this forum who are far more knowledgeable than I.

 

[Katsmeow]

I don't think you mean SSI. SSI is supplemental Security Insurance and is basically for disabled people with limited resources. SSDI is the one for those who are disabled and have work credits (normally SSDI works out to be more).

But, from your question I would guess that your parents are really just talking about garden variety Social Security benefits. Did your parents have a lot of work that they did which was not eligible for SS? The amounts given are low for people who worked SS eligible jobs throughout their lifetime.

Their cash assets total $684,000. 4% withdrawal rate for that is $27360 per year. If you father takes Social Security now that is $10884 per year. That gives an income of about $38000 per year. Plus, of course, they have the income from the rental.

Of course the 4% withdrawal rate assumes the cash is invested in some reasonable allocation and it isn't all stuck in Ally Bank.

And this assumes that they are really only spending $36000 per year. That seems low to me but with a paid off home can be possible in some areas.

When DH retired he took a lump sum on his pension and we figured out asset allocation and invested it all at that time. Of course, index funds almost entirely (we did get some Wellesley).

For us, we mostly had all our money in either index equity funds or bond funds (plus the Wellesley). The exception is the cash that we do keep to pay. Some people withdraw on a monthly basis. Some withdraw annually. Just depends. We did at one time have some money in a CD that was paying well at the time but we don't have that currently. I am not much of a fan of having a lot of cash. I feel I can always sell some of the bond funds or the equity funds when I need cash (which I sell will depend on rebalancing). But, others like to have more cash.

The allocation will depend on what your parents feel comfortable with. Currently we have about a 50/50 allocation. It has varied between 55/45 and 45/55 at different points. We are a little older than your parents. But, that is what we are comfortable with. Some people want a different allocation. Your parents need to make their own determination of what they are comfortable with.

I don't know what you mean by draw down v. invest. We are always invested. Yet, we must draw down somewhat in order to meet our spending needs. The withdrawal percentage to use depends on a lot of factors. You might run FireCalc to help in determining this.

I don't keep a separate emergency fund as a retired person. I have all my funds that I am ever going to have. Of course, emergencies do happen and budgeting should plan for that. Many people will actually budget for a new roof every X years or a new car every Y years. Of course, those aren't emergencies exactly but are expenses that have to be planned for.

Your parents need to consider if that $36000 a year includes those kinds of expenses that will happen occasionally or rarely. A couple of years ago we spent over $10k for a new retaining wall. That wall will last many, many years and we are unlikely to ever have that expense again. But, it was a foreseeable expense. At some point, our house will need a new roof. Or maybe a new AC will be needed or a new car, etc. Those kinds of large expenses need to be planned for and need to be included in spending. So if they plan to buy a $30000 car every ten years then you need to add $3000 per year to their expenses. Make sure that their spending numbers include those expenses.

Yes, it is great for many to defer Social Security to get a larger benefit later. But, it isn't always practical. And, doing so can really deplete the cash nest egg. In this situation, if I was your Dad I would probably take Social Security now and your mom might consider deferring hers if it wasn't needed when she gets to the point she can collect. But, again, that is a personal decision. Some people don't mind depleting cash to defer Social Security. I am not a fan of doing that.

 

[Ready]

Welcome to the ER forum. Based on your post, I’m wondering if your parents may need some help with budgeting before they potentially start spending the $550K. They really don’t have much in savings for their age which makes me wonder if they have been spending pretty much everything they earned over the years. If so, is there any risk they might blow through the $550K too quickly?

 

[Teacher Terry]

I have known people that were self employed with low SS. This is because when they were paid in cash they didn’t claim it as income. For instance my groomer did this and now her SS is low. No idea if this is the case here or not. It’s important that your parents have a accurate number for how much they spend.

 

[ivinsfan]

Have the taxes been paid on this 550K?


When your Dad hits 65 he will have health care costs on Medicare so that needs to be added to the budget.


What do your parents think they will spend and how do they feel about the size of the nest egg. For the short term they will fine but they need to think long and hard about what happens when one of them dies. You can't take SS early and start spending your nest egg without giving that some serious thought.

 

[figuy1]

With the cash sitting earning a negative real return, I'd park 60% in equities. The 4% rule is based on having at least 50% in equities and historically having below 60% increases your odds of running out of money sooner after inflation is taken into account. One set it and forget it option to have a 60/40 portfolio is the Vanguard Balanced Index Fund (VBIAX). You can have it set up to auto withdraw set amounts monthly directly into their checking account and they never have to touch it.
The general advice is to try to spend down taxable accounts first and before taking SS if you have enough to make it which it seems like they do. If they are in poor health taking SS early might be better, if in great health, delaying is usually better. One thing you'll want to manage is keeping their AGI low and flat over the years so your mom can continue to qualify for Medicaid or the $0 premium/$0 deductible ACA plans. If they have earned income this year, they'll want to max out what they can in the roth this year so it can grow tax free.

 

[Sunset]

OP - I see a couple of issues:
The expenses are not accurate if they don't include things like roof, A/C, water heater, etc. as mentioned by Katsmeow

Also, the rental home is not worth the selling price as there are costs for selling it, and your parents will pay depreciation recapture tax of 25% on the depreciation (even if they didn't take it) plus capital gain on the actual gain.
What happens when the rental needs a new roof ?

Since the parents (IMHO) seemed to operate a bit off the books, which is why SS is low, I have to wonder if the same is true with their spending. Meaning they are under-counting the spending by not accurately tracking cash paying as there is no record.

 

[OldShooter]

...
1. Should dad start collecting SSI right away? Let's assume planning until the age of 95.
2. What percentage of the $550k should be put away for emergency fund?
3. How much of the $550k should be invested in the market? What allocation? Lump sum or dollar cost averaging?
4. With SSI + the rental income, they would have roughly a $400 deficit at the minimum.
5. What would be an optimal strategy to draw-down versus invest?
6. When will mom's SSI come into play? When should she start withdrawing? ...

This is all good stuff and you will get some good inputs, but in the end only you can answer these questions.

First, I suggest that you educate yourself a little bit more. Try these, in this order: "The Coffee House Investor" by Bill Schultheis https://www.coffeehouseinvestor.com/ (This is Bill's first book. Don't start with his second book, which is a kind of sequel.)

"The Bogleheads Guide to Investing" by Taylor Larimore et al https://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0470067365

Second, consider hiring a financial planner on a fee for service basis to help you and your parents develop a plan. I have no direct experience with these sites, but they seem to get good reviews here:garrettplanningnetwork.com www.xyplanningnetwork.com napfa.org (Note, in the planning world "fee based" can mean the advisor gets paid a % fee on the assets he manages. You do not want this, though that will probably be what they try to sell you. Stick to paying a flat $1K or maybe more for a good plan and maybe an annual few hundred for a checkup.)

 

[JRon]

Most business owners I know run a few personal expenses through their business. It reduces taxes which, of course, includes social security. The OP’s parents need to be sure to account for any personal expenses the business may have paid when planning for retirement.

 

[ivinsfan]

OP - I see a couple of issues:
The expenses are not accurate if they don't include things like roof, A/C, water heater, etc. as mentioned by Katsmeow

Also, the rental home is not worth the selling price as there are costs for selling it, and your parents will pay depreciation recapture tax of 25% on the depreciation (even if they didn't take it) plus capital gain on the actual gain.
What happens when the rental needs a new roof ?

Since the parents (IMHO) seemed to operate a bit off the books, which is why SS is low, I have to wonder if the same is true with their spending. Meaning they are under-counting the spending by not accurately tracking cash paying as there is no record.

Well hold on if they need cash they could probably sell their primary home tax free and move into the rental.

 

[pb4uski]

....Now that there is no business, they have $550k in cash. Questions:

1. Should dad start collecting SSI right away? Let's assume planning until the age of 95.
2. What percentage of the $550k should be put away for emergency fund?
3. How much of the $550k should be invested in the market? What allocation? Lump sum or dollar cost averaging?
4. With SSI + the rental income, they would have roughly a $400 deficit at the minimum.
5. What would be an optimal strategy to draw-down versus invest?
6. When will mom's SSI come into play? When should she start withdrawing?

Any and all advice greatly appreciated!

I agree with others that $3k/month of spending seems low for NJ. Have they been on medicaid when they owned the business or did they have health insurance?

1. If there is a reasonable expectation that he will really live until 95 then no he should probably delay his benefits. Check out opensocialsecurity.com and check the additional input box near the top of the page. I suggest changing the mortality to 2017 CSO mortality and changing the discount rate to zero. You can then do runs with different assumptions and see how those assumptions impact the expecd present value of benefits.

2. Since they have ready access to that money no emergency fund is really needed... just sell investments if money is needed for an emergency.

3. Since after considering income from the rental they have plenty, they have "won the game" and can invest either very conservatively or very aggressively depending on their risk appetite and desires to leave a big legacy. A prudent KISS solution might be putting the whole enchalada into Vanguard Wellesley and setting up an automatic monthly redemption for their monthly expense gap that goes to thier checking account supplemented with special withdrawals for "lumpy" expenses.

5. Since so much of their money is in taxable accounts and they are so overfunded, draw-down strategy isn't much of an issue. I would consider fully converting their tIRA to Roths in the first year of full retirement and and invest the Roths aggressively so they can grow tax-free.

6. See opensocialsecurity.com

 

[Sunset]

Well hold on if they need cash they could probably sell their primary home tax free and move into the rental.

That would work to raise cash.
A big issue is would they want to move into the rental.


They would still owe recapture when they sell their rental for the time it was rented when they eventually sell it. However if they died it would step up basis to the beneficiaries.