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« Take Time to Smell the Roses | Main | 4 Reasons Why Successful Investors Choose Dividend Investing »

January 21, 2013

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I think you raise a good point about them wanting to enjoy the time they have with each other. There is more to life than money. Sometimes I tend to forget that :(

"They are not real interested in trimming down expenses". I think that settles it.

I tried to narrow this down to the guts and probably made some incorrect assumptions, but what I got was this:

monthly "unearned" (non-work) income: 4K
monthly earned income: 8K

"extra income" (savings): $800

Liquid assets less than home balance (so mortgage expense not going away).

This means income from work can be reduced by only 10%. Even if there is a practical way to do this (likely not for a reduction this small).

"they want to enjoy the time they have with each other and the family." - this is the part you have to look in the face seriously. I keep my spending greatly below my income precisely BECAUSE I want to 'enjoy' more 'time' with my family. My overall income is similar, but I save half of it to give me this freedom. I understand travel is expensive and good times together often involves costs, but not sure it needs to be on so high a level.

After its decided that expenses can't be cut, the obvious next step is to change the work situation. The following two statements don't jive: "Mom works full time and is a leader in her industry. She is highly regarded by her colleagues, who are concerned she may retire" and "Her current employer won’t let her reduce hours and doesn’t pay her what she deserves. She has several offers from other companies, but is worried that changing now would increase her hours rather than decrease them." A leader in the industry with multiple offers has control over their contract terms, including hours/wk and pay. I understand the fear comes from the small nest egg and tight income/expense ratio, but this sounds like someone with the power to stand up for themselves (and its not like this cant be worked out prior to quitting current job).

If you want and can include in family business at better hours and can subsidize by paying the old salary for the fewer hours, without difficulty for the family business. Then great, thats what you do for your mom who supported and raised and cared for you.

Wow, $1000/month for food for 2 people is a lot. Do they eat all their meals out?

Question: Would they be willing to sell the house? From the remaining balance I suspect it is more house than they really need.

A 2 Br apartment should be much less expensive and better suited to being able to travel more. At 88 I doubt your dad wants to do much home maintenance.

Because of the age difference a strategy to consider- live off savings for a while while your Dad is in good enough health to travel, then have your Mom go back to work at some point later. A lot of people don't make it to 88, and you never really know how much time you have left.


-Rick Francis

Paying off the car:

The current payments will have the car paid off in 3.25 years. At 0.9% interest this will total about $250 in interest over that time which is extremely low. Paying it off early will have no noticeable impact on their situation other than freeing up the payment but if you have the cash sitting in an account to pay for it then it is really not any extra burden to just pay it out of that account as it comes due each month. I think it is likely the case that there are better places for this money than paying off the 0.9% interest loan which is so close to zero that it almost might as well be.

Savings:

The money they are saving I hope is going into a Roth IRA. Your mom makes enough earned income for this and since they are both over 50 there could be Roth money put into an account for each of them that totals up to $13,000 a year ($13,000 for 2013, $12,000 for 2012). This will help reduce future taxes on any gains on that money. There is a 5 year rule that doesn't allow distributions without penalty until 5 years after the Roth is established so if neither one of them has an existing Roth then this could be a problem. But if they have one even if it has been dormant for a while then new savings should go into that vehicle. If they don't have one then they can't draw money out a new one for 5 years without penalty and at this stage in life that is probably not a restriction they should take.

House and Mortgage:

I agree with Rick Francis that selling and moving into smaller cheaper rental housing is about the only option I see to reduce expenses given that they don't want to change their lifestyle. I suspect they may be attached to their current house and that is understandable. That is a personal decision and one they many not consider even an option as it may be a very personal thing for them. There is over $1,500 per month there between the mortgage and the HOA so if they could rent some place for $1,000 or so that would free up $500 per month in addition to freeing up $120,000 of cash that is tied up in the house based on the net worth numbers presented above. It's an option to consider depending on their level of attachment to the house.

Employment:

Your mom will need to continue working in some fashion to support the lifestyle they currently have. It appears she could cut back some and still make it work but not too much. To lose her income entirely (which looks like it could be 100K per year with bonus), would exhaust all savings in a few years.

Working for your family business looks like it could be a good way to do what she needs. I only caution to be sure your business is stable enough for this to work long term. It could create a terribly difficult situation if the business contracted and you could no longer support her salary. She would feel like she should cut back to help you and you would feel like she couldn't afford to do it but knowing that the business can't afford to keep paying her either. It's just very tricky given how much she needs that money so I would urge caution when considering that option. Nothing is guaranteed so I wouldn't be afraid to hire her on board, I would just do so with some conservative analysis of your business first. Perhaps the plan could be to work a little longer at her current job until your business is a little stronger or the path a little more clear.

They are blessed to be able to continue to work as long as they have and at such a high level. Their financial situation is not so different from many others I do not think. They are continuing to live at a very nice level and the working has allowed them to do that. I think the plan of continuing with that and trying to trim hours and ease into a semi-retired situation is the right plan to pursue.

"They are not real interested in trimming down expenses, they want to enjoy the time they have with each other and the family."

I think they'll have to trim down at least a little...isn't that sort of normal for all retired people?

Even if they just prioritize and trim down on the least important stuff, that would help. So if travel is the most important, stop spending $1000 a month on food. Or if food is really key, than cut back on some of the miscellaneous expenses. Something has to give to live on a net worth of $250,000...I mean, they may not need it to last 30 years at this point, but she can't retire if they keep spending like they're loaded.

Sorry if that came out harsh. I said it out loud it in a realistic tone, not a mean/judgy one. Cutting expenses just has to happen unless they had a million at this point...

Dear Mom and Dad,

I am glad you allowed your child to write up your profile. I find it so wonderful that you two were able to find happiness after the loss of you previous spouses. It brought a tear to my eye.

I hope your child shared with you my recent FMF profile on a related subject. It can be found at: http://www.freemoneyfinance.com/2012/12/reader-profile-jl.html

My wish for you both is that you begin to live the fuller life you want to have. And to begin now, not later. I don’t know is Mom enjoys her job, or if Dad is lonely at home alone. You need to consider these factors as well.

With respect to working, IF Mom wants to work, use her contacts and consider about consulting. That way Mom can work when she wants and refuse jobs she doesn’t want.

I know you don’t want to cut back on expenses, but a $43k “other category” needs to be examined. By my math that $43k is over half of your net earned income! I am only guessing here, but do you entertain your family a lot? buy gifts for the kids, grand kids and great grand kids on all occasions? do you treat everyone for vacations? You two have spent your whole lives taking care of family; it is now time to enjoy the fruits of your labors. My suggestion is to take a back seat to entertaining, gift buying and treating. It is now time to “pass the torch”. Let you adult children take the lead in entertaining. Keep your gifting to a minimum, if there is any money left when you both pass on family can be “gifted” then.

Your travel time is limited; take that trip you two have been planning. Then come home, cut back and relax. Enjoy your time together

Wishing you the best,

JL

All - thanks for taking the time to reply. Son of Mom and Dad here.

@Steve, @Crystal: I think both of you are suggesting a "back to basics of financial planning" and that is addressing priorities, and then allocate the $'s to the priorities. We have headed down that discussion path and will likely try to re-visit. We'll likely need to break through some level of "its all important".

Re: $1,000/month on food - this really covers food and their household upkeep expenses. They do frequently eat out.

@Rick, @Apex re House: I've assumed they are emotionally attached to the home and have not suggested down sizing. But I haven't asked and is at least worth a discussion. Great (outside of my thinking box) idea.

@Apex re similarity to other's situations - I couldn't agree more and is part of why I wanted to include the profile... I think you have a good understanding of where we/they are coming from. Like many others on this site, I value your input - thanks. On Mom joining our business, we have developed an extremely conservative business plan budget and are continuing discussions to make sure everybody is on the same page before moving forward.

Any more out of the box ideas?

I am very impressed with Mom and Dad – I think they have room to have their cake and it too.
I would like to piggyback on Steve’s comments above with some actionable advice. What about if Mom sends a couple of these companies that have given her offers before a proposal letter that exactly outlines her expected salary and work schedule something to the effect of:

“I have appreciated your interest in me joining the team in the past; I would like to lay all my cards on the table and see if that is something we can make happen!!.....” Then detail very clearly the end result she is looking for. I have helped many people do this in order to decrease hours or, in some cases, work entirely from “home” (wherever in the world that is). This is very much a possibility and I think Mom doesn’t realize she actually has that as an option. What is there to lose (except a couple hours effort) in typing up some proposals to the interested employers? She might even get the counter-offer she is looking for as a result of this exercise.

I have some additional actionable advice I want to throw out there but I have a meeting to run to; I’ll check back in a little later. Mom and dad have done great!!! I can tell they are enjoying their life and that is literally 80% OF THE BATTLE!!!! ;-)

*Please forgive typos I didn’t run this through an editorially review :-)

Its great they have a full life at this stage in their lives.

As others have said I don't see any way to cut moms hours unless they cut spending. They're already spending nearly all their income.

I would not pay off the car early. 0.9% is dirt cheap interest rate. They should be able to earn more than that on their money somewhere. Its a shoter tem loan so its not a big deal either way.

If they're willing to downsize then they should absolutely do that. I'm assuming they want to stay in that house. In their situation I might consider paying off the home mortgage faster. 3.3% is also low but its guaranteed return. Also it would help remove that large expense long term. That would set them up so that they might be mortgage free and have lower expenses. That will help them prepare for the eventuality of future reduced income. The reality is that mom is very unlikely to be able to work full time forever.

As far as general investing advice, at this point in their lives I'd primarily look at safe bond funds. They should not be risking their money in the stock market. Theres high risk and volatility and they can't risk losing a high % of their money. THey need to stick to safe investments and worry about conserving their principal.

@JL,

Thank you for the kind words and sharing your story. I have shared it with Mom and Dad and they were moved.

You have hit on some of the questions behind the question. I was hesitant to go there in the original post, but I think it is worthwhile and weighs heavily on our minds.

Most retirement planning focuses on long time horizons, trying to balance the current with the future, making near term sacrifices to provide for a better future. Although nobody knows for certain what their lives will bring, Mom and Dad are likely closer to the end of their journey than many of us FMF readers. They are both very blessed to have such great and long careers and lives.

But they're alive and well! They are enjoying the fruits of their labors. They are living their lives.

So how do you balance? There's not much time for sacrifice, but if so, at what cost?

Like you, JL, I'm (passively) encouraging them to live for today. I say passively, because I'm not poking at things like eating out, that large "other" category, their enjoyment of entertaining and treating their family and friends.

But am I doing them a dis-service? The un knowable answers: Will they have enough to get by? Will Mom be able to work for the next ?? years so they can continue their current lifestyle? Right now, she never wants to stop, but will changes in her health change that? Will changes in Dad's health change that? What if/when Mom dies? What if/when Dad dies? Next month, next decade? How will their priorities change? Will they move in with us? With one of our siblings? Retirement home?

Some of these are crystal ball type questions. We chose to consider them wile tackling some of the "easier" questions on this forum. We have started talking through some of them too, but they are tough topics.

Our financial planning (in our 40s) makes basic assumptions about all of these eventualities. Plan to live to 95 with some left-over in case we live longer. If we don't live that long, then the kids will get a little bit more. We'll worry about the details when we get there.

But for Mom and Dad, this is their here and now. They have both survived loosing their first spouse. Neither wants regrets from near term sacrifices.

I'm excited they are enjoying life, but nervous/scared for them that a small change could dramatically impact their ability to continue.

And it all gets back to: How do you balance now with later? How much does/should their age impact this balance?

There are tons of great resources for retirement planning at 40. Is it as simple as adjusting an asset allocation to 70/30? 80/20? 100/0? Not likely. Are there resources for similar issues later in life? Does AARP have any material?

Are there tweaks to their current path that could help out? Apex's idea on the ROTH is fantastic. I hadn't even considered a ROTH at that stage of life, but now I'm not sure why not...

What would you do if this were your Mom and Dad?

So back to some of JL's specific thoughts:

Mom's career isn't well suited for consulting (but again, something we hadn't considered being in the situation). We have spent a few marathon sessions brainstorming her needs and looking at ways to minimize her time and maximize what our company/other companies could do for her both near term and long term. We have developed a pretty comprehensive "needs" list in order for her to transition. Part time/more than normal time off and on her own schedule are near the top. We are currently racing with one other major provider for her services.

Regarding Mom's desire to stop working - no way! Cut back, yes.

Regarding Dad lonely at home? I don't think so, but that's another good topic to broach.

Thanks again for the ideas and suggestions.

@Nate,

In Mom's industry, she meets with her other suitors periodically already. We are currently racing with one other major provider for her services. They are more established, but we are likely more flexible. We are really looking to do what is best for her.

She really wants to help us help her, but is keeping the other company as a strong viable option.

We look forward to your other ideas too!

@Jim,

Our main thoughts on paying off the car early was to increase the monthly cash flow and reduce monthly expenses. We had similar thoughts with the mortgage. However, I don't see a 10-year path to doing both without some sizable changes in their budget, or downsizing. So would it really be worth it? Great after dinner discussion topic...

Their concerns with any investments are the uncertainty of the future. With being in such a lengthy low inflation period (that can't go on forever), they are concerned that bonds will not meet their needs. They don't like the volatility of equities. So preservation puts them into cash? I'm not sure what would be best for them. What are others doing to preserve capitol?

Again, my approach is much different than theirs because of the time horizon...

Thanks for the inputs!

Son, :" they are concerned that bonds will not meet their needs. They don't like the volatility of equities. So preservation puts them into cash?"

Why do they think bonds won't meet their needs? Bonds should have higher yield than cash. You can find relatively safe bonds.

Cash would have next to nothing for interest but its safe.
Bonds have some interest now (1-4% today) and its very safe, but not always 100% safe.

Paying off their mortgage saves then 3.3% guaranteed. Thats completely safe and reasonable return given todays interest rates.

If they can't pay off their mortgage entirely within a few years then they may be able to refinance it or recast it and lower the payment at least.

I agree they shouldn't be taking the risk in equities.

I hate to say it but are their estates well organized in case something happens to one of them? I recently saw a woman's jewellery pass to the children of the new husband because the woman had not let her wishes be know and firmly stated in her will. Her own children are upset but have no legal recourse.

This is not just for the lovely seniors outlined in this story but for everyone in their families - especially those who are starting new businesses. Everything in writing, even between beloved kin, is the safest way to go.

>What would you do if this were your Mom and Dad?

I would help them try to make the best choice for themselves. Not changing their spending habits now is a choice, but it may not be the best choice.

For example I suspect that the children would happier with less expensive gifts and more security for Mom and Dad.

Eating out is fun- but inviting friends or family over for a home cooked meal can be more fun and a lot less expensive.

I would look for areas where they can decrease their spending without greatly impacting their happiness.

>Any more out of the box ideas?
I suspect they want to remain independent, however historically children have supported their parents in their old age. Even if you don't want to use family resources it makes for a better worst case scenario so your Mom and Dad could tolerate a bit more risk- for example your mother can risk switching employers.

>And it all gets back to: How do you balance now with later? How much does/should their age >impact this balance?

That is very difficult- it is especially difficult due to
the difference in their ages. With the age difference I would start by making individual plans and then making a combined plan for both of them that is a blend of the two individual plans.
>There are tons of great resources for retirement planning at 40. Is it as simple as adjusting >an asset allocation to 70/30? 80/20? 100/0? Not likely. Are there resources for similar issues >later in life? Does AARP have any material?
The problem is that later in life there just isn't that much time or risk capacity that portfolio adjustments will work well. You could risk 100% equities, but if there is a huge drop in value your parents would be forced to reduce their standard of living drastically.
Also, with 10-20 years there isn't enough time for a small difference in the rate of return to make a large difference. At 40 you have 20-30 years of income and 20-30 years of compounding. increasing contributions and so changing asset allocation makes a much bigger difference.
>Are there tweaks to their current path that could help out? Apex's idea on the ROTH is >fantastic. I hadn't even considered a ROTH at that stage of life, but now I'm not sure why >not...

Actually the math works out better for a standard IRA than a Roth because we have a progressive tax system. I've been planning to write a blog post on it, I've worked out the math already and you have to spend a surprisingly large amount in retirement for the Roth IRA to be a better option assuming that their spending doesn't change and that they contribute the tax deduction to the standard IRA/401K.

If your Mom isn't maxing out any employer match, she should definitely do that first.


>Their concerns with any investments are the uncertainty of the future. With being in such a >lengthy low inflation period (that can't go on forever), they are concerned that bonds will not >meet their needs. They don't like the volatility of equities. So preservation puts them into >cash? I'm not sure what would be best for them. What are others doing to preserve capitol?

If I was retired I wouldn't try to over analyze the markets- I would pick a fairly conservative asset allocation and stick to that. I would use index funds to keep costs low and I would include at least some equities to keep up with inflation. I would - say 30% and I would stick with short or medium term bonds as interest rates are historically low.

Jane made an excellent point on estate planning- not only should they have wills but it would be very useful to have a list of accounts and documents such as power of attorney and advanced health care
directives as there may not be time to prepare these when they would really be needed.

-Rick Francis

Does Mom and Dad share all their savings? How much did they bring together which is now a collective 150K? I know if I was 85 or older and I was down to my last 100 grand I would look into an immediate annuity. You can get it with 5 or 10 years paid to beneficiaries, or they can get their own separate policies. Workout the numbers to see what is mathematically best.

They should downsize their property sooner rather than later (yes, it is inevitable for a full maintenance high worth property UNLESS you can afford onsite care). It is hard to leave your home of x years for sentimental reasons and that's why there needs to be a high motivation for making such a decision to move on. For them examples of rationale will be because of financial, medical, and daily activity constraints.

I would advise my parents to sell and then buy a property with all cash and liquidate remaining equity. Get a property that is one level, that has built in ramps and such, things that will make living there VERY attractive and so low in maintenance that it will INCREASE their time they get to spend with family. Thousands will be saved yearly in property taxes.

Beyond that other out of box ideas would be to take a reverse mortgage on their new property. Since they have been married for more than 10 years, find out if they have they taken spousal benefit distributions from their social security. Also, do they have generations of well to do families that have lived in the United States? Have they performed a query to see if they are heirs to unclaimed property?

In the end if worse came to worst I'd let my parents know that I would take over their finances but not before I go years and years of pestering them to change their excessive spending habits.

My biggest concern is that as they currently stand, they cannot support their current expenses if Mom loses her job or becomes unable to work. Even without taxes and "other", you're looking at $56K a year versus $46K. That would be a big hit and equates to elimination of their current lifestyle, not just cutting it back. The $150K would be gone in under a decade (at ages 94 and 86 respectively) just keeping the bills and insurance afloat, even ignoring other possible costs which precipitated the job loss. Mom and Dad are completely dependent on Mom's salary and it should be all bonus at their stage in life, not necessity.

So not wanting to be all gloom and doom, the realty is that with some tweeking over the next few years, they should be able to bring expenses down while increasing savings and minimizing current lifestyle impact with the eventual goal to ensure their non-work income covers their basic living expenses, and then some hopefully.

I also will echo a concern already mentioned with respect to ensuring their wishes are clear and in writing with respect to assets, benefits, etc. If they haven't been reviewed in a while, they may want to revisit with someone they trust. Biggest issues are assumptions versus discussions and getting facts.

For example, my MIL thought she had set up her IRA, savings, and stocks so that if she passed it was split between all her children, pretty typical. She asked me to look over the documents once when she was switching financial advisers. I discovered she had left everything to my wife and her other children were actually listed as secondary beneficiaries across the board (e.g. they only inherited if my wife passed first). So if my MIL and wife had been in a car accident together, and my MIL died at the scene and my wife lived for a day or week longer before passing. I would have inherited the bulk of my MIL's assets and my sibling in-laws would have had no legal recourse.

Despite fleeting thoughts of disabling the driver's side airbag and tampering with the breaks on my MIL's car :-), I revealed the error to my MIL and after a long discusion finally determined what she had been thinking, which turned out to be that she thought my wife had to be listed as the primary beneficiary because she was also the executor of my MIL's estate in her will.

That said, if you don't have it clearly in writing, and what is in writing is what they both want and agree to, then there could be a host of issues.

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