Need Advice for Stepbrother

joesxm3

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I had mentioned him on another thread. He lives entirely on government payments and recently bought a house. He is very unsophisticated and gullible leading to people probably milking him for money.

He got a VA loan on a $247K house. The monthly payment (mortgage, tax, insurance) is something like $2200. He gets $3400 VA disability plus $700 social security.

He previously paid $900 rent so the jump to $2200 plus other house expenses is something he is not used to. He plays fast and loose with his money and it looks like he will be operating at a negative cash flow if he does not tighten his belt.

His father died this week and he is likely to get $50K inheritance.

He seems to have absolutely no financial literacy. He has a checking account and a savings account at a credit union but has no idea what interest he is getting.

I am going to advise him to try to do something sensible with the $50K.

My initial thought is to have him open an account somewhere like Fidelity where he can get a 5% return either on a money market fund or some T Bills. I might have to be set up as an interested party to help him.

My main question is what people think the asset allocation should be.

The main goal seems to be to get some sort of return and maybe structure it in a way that slows down his spending on useless stuff or having it sucked by his friends.

With such a small amount of money and a negative cash flow does it make sense to keep it 100% in fixed income?

$50K seems basically like an emergency fund. BTW he seems to not have any credit card debt.

I thought maybe to put $10K into some sort of equity allocation and maybe DCA into that. He has never had investments so any volatility will probably seem scary and I don't want to get blamed for pushing him into stocks.

BTW he drinks too much but as far as I know does not have any drug use sucking away money.

Also, I realize that I probably should not get sucked into this too deeply.

Thanks.
 
If he really wants help, I'd keep the 50k in the money market. He is likely going to be needing some of it each month.

Putting any in stocks and then having stocks go way down would not be good.

I'd steer clear in general. Nothing good can come from helping unless he really wants help.

So many people buying houses they can't afford. Renting for $900 was just fine and allowed him some cushion for blow money. Now that is gone. House poor.
 
Since your plan requires him to act to open an account, unless you sit there and walk him through the steps, I doubt it happens. I don't care much for immediate annuities, but in this situation that might be the safest option for the $50k. The lifetime income stream would be the selling point.
 
Your stepbrother sounds like a composite of several of my extended family. As you probably know, the monthly costs are only the beginning of housing costs - there will be maintenance, upkeep, repairs, etc. This is harsh to say, but he's probably going to lose the house unless he can get paying roomates to help offset the costs and even that could come with some real downsides.

Anyhow, I suggest that the priority here is overwhelmingly preservation vs return. So, equities are out. This more like CD's or money market. CD's might be better because would seem less accessible. Ideally, he would allow you to hold it for him, though you might not want to get in that deep.
 
I am going to advise him to try to do something sensible with the $50K.
Has he asked for any advice? If not, a whole buncha you-shoulds won't get you very far.
 
Since your plan requires him to act to open an account, unless you sit there and walk him through the steps, I doubt it happens. I don't care much for immediate annuities, but in this situation that might be the safest option for the $50k. The lifetime income stream would be the selling point.

Hmmm, wish I'd thought of that! Anything that could preserve value and get the decision making out of his hands would be a positive. One note of caution though would be to make sure the income from the annuity would not mess up any other govt benefits he might be getting (ex. Medicaid).
 
I don't know much about annuities.

If $50K at 5% would yield $2500 per year in interest or about $208 per month, how much would an annuity pay per month (if that is how they operate)?

The annuity keeps the $50K, right? Do they pay back some of the principal in the monthly payments based on some actuarial calculations?
 
13 week T-bill at fidelity on auto-rollover plunking cash into his account state tax free every three months? So about $1325 cash infusion going to him every three months or $458/month and the $50k just sits there out of sight throwing off money.
 
13 week T-bill at fidelity on auto-rollover plunking cash into his account state tax free every three months? So about $1325 cash infusion going to him every three months or $458/month and the $50k just sits there out of sight throwing off money.

13 week t-bills are paying 10%?
 
calmloki's T-bill idea is also interesting since, unlike with an annuity, the principle would be available to fund an emergency, the downside is the possibility future interest rates will be lower (and I don't think $50000 in T-bills will generate $400 per month)
 
Isn't that more like $675 per quarter with the 13 week T bill?

Roommate makes sense. I had roommates when my income was low. However, the type of roommate that would put up with his drinking would probably not be a good combination.

The annuity might be interesting once I understand them better. He did express the idea of "living off the interest" when we briefly discussed getting 5% somewhere.

One downside to the annuity is that it cuts off the option of taking some principal to deal with a big expense. The house has a new roof and seems in good shape.

I suppose with an annuity protecting the principal if he loses the house he can go back to an apartment and a workable balance sheet. He did get a nothing down VA loan.

The annuity might be a set it and forget it solution that would let me back away before I get sucked in more than I care to.

I am just starting probate so I should have several months to think this over before any money is given out.
 
The VA benefit is tax free, right? If so his situation may be better than it appears. PITI seems high for the loan amount. I know many states have income and property tax breaks for vets, esp disabled. It might be helpful to help him research those details. He navigated jos way through the VA loan and has no CC debt so he’s doing well in those areas. I know several vets choose not to take advantage of all they’ve earned.
 
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Good point. His father had some tax breaks like that. But I bet that means having to engage with his mortgage company to adjust things. Might be worth it but here I go down the rabbit hole.
 
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calmloki's T-bill idea is also interesting since, unlike with an annuity, the principle would be available to fund an emergency, the downside is the possibility future interest rates will be lower (and I don't think $50000 in T-bills will generate $400 per month)

You guys got me checking:
The auction on 2-26 I bought CUSIP 912797HS9, settlement 2-29, maturing 5-30-24. Paid $98.67165. At maturity Unc Sam pays me $100, so $13.2835 interest in 13 weeks x 4 = $53.134 in 52 weeks, assuming the 13 week T-bill stays invested all year long and the rates don't change (bets on that?). About 5.385% on the original $98.67165 investment.

BIG OOPS on my part: I'm thinking hundred, investable amount is fifty. Cut my numbers in half! sorry
 
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Since your plan requires him to act to open an account, unless you sit there and walk him through the steps, I doubt it happens. I don't care much for immediate annuities, but in this situation that might be the safest option for the $50k. The lifetime income stream would be the selling point.

I was thinking along the same lines but I think what might be even better is to put it in Wellesley and set up a $250 or $300/month automatic redemption and transfer to his checking account.

I helped my BIL's mom set up something like that many years ago and it worked out well. If Wellesley does well then you can always adjust the automatic redemption upward.

Also, unsure of the subject's health/longevity and whether a life annuity is a good product in that situation.

A DIY annuity but where the money can be accessed if needed in an emergency.
 
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Good point. His father had some tax breaks like that. But I bet that means having to engage with his mortgage company to adjust things. Might be worth it but here I go down the rabbit hole.

Also, many municipalities offer property tax benefits to veterans or disabled so he should make sure he is getting those where they are offered.
 
He is definitely going to need roommates or lose the house. May still lose the house if he drinks a lot, as it costs $$$ .

At $22,800 cash after the basic house cost does not leave much wiggle room.

Be aware, even if he accepts help, he may thwart your efforts later once he wants to spend some money.

Happened with my Sister, she was a spender, but with a low income. Then she inherited $50K , so I helped her buy CD's with the money. Once she realized she could cash them (pay penalty) and spend the money they were gone in a matter of a few years.
 
From your description, there's nothing you can say or do to help him until he wants your advice.
 
He seemed interested when I told him that he could be getting 5% interest and that he could apply to have the state pay for Medicare.

I found the property tax relief applications.

You are right that he will not follow advice unless he wants to. There is a good chance he won't listen about tightening his belt and following a budget.

I will clarify whether he is wants me to help when I see him tomorrow.

Probably I will help him put the money where he can get a return, and help file the Medicare and property tax applications. After that he might be on his own.
 
Finding ways for him to save money and obtain free money is good works by you.

Even if help in the past did not seem successful, another try is all that you can do right now.
 
Perhaps just pay down and refinance the loan?

That would lower the payment a lot, helping deal with the negative cash flow issue which is the real problem, and put the money out of easy reach for bad decisions.

At current mortgage rates, it may have a higher guaranteed interest rate return than lots of other options. In his income bracket the mortgage deduction is not worth a lot. And it’s a one-and-done deal. Not hard to manage.

I’m not sure what the terms are on a VA loan. Zero experience with that.
 
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Another good point. He is paying 6.5% or so on the loan. Per Zillow taxes are $3303 per year.

That is what I did with my 9% mortgage back in 1987. Every spare penny toward mortgage. Paid it off in 7 years.

Maybe pay $40,000 on loan and keep rest for emergency. But if he defaults the money was wasted.

Great ideas here. Thanks to all for the advice.
 
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