Seeking feedback to help parents into retirement

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Herekittykitty
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Re: Seeking feedback to help parents into retirement

Post by Herekittykitty »

Duckie wrote: Sat Jul 17, 2021 5:17 pm
........,He can move the IRA to a different custodian without withdrawing the assets. At this point he should move to Vanguard, Fidelity or Schwab. Once there he can purchase a low-cost index fund, possibly a target-date fund.
Duckie, what a great idea. Simple and saves fees.
I don't know anything.
cbeck
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Re: Seeking feedback to help parents into retirement

Post by cbeck »

Their emergency fund of $8k is too small. So, I would think twice about encouraging them to pay off their outstanding debt. There are a lot of emergencies that can occur at that age such as loss of a job or the death of one of them. Replacing a lost job at that age is tough to impossible.
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SuperTrooper87
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Re: Seeking feedback to help parents into retirement

Post by SuperTrooper87 »

Herekittykitty wrote: Sun Jul 11, 2021 11:19 am I listed out the parents' information to make it easier to visualize. I can edit in any corrections or additions. I'll likely edit this several times.

HIM: FUTURE HOPE OF SETTLEMENT (NOT LISTING THIS AS A CURRENT ASSET): "father just told me he may be coming into an unknown amount of money from the BSoA class action suit. Could be 10k,50k,100k or more." Unknown if, when, and how much if any.

ASSETS:
Emergency Fund: $8,000
Other savings:
Checking:
Investments (also listed below under HIM): 17k in a 70/30 in his 401k.
2 cars with loan balances (not known if the car loans exceed the resale value of the cars.

DEBT (THEM): (list out per debt including balance, payment, interest on each loan, and scheduled pay off date)
18k in consumer debt - 4-6% interest
Car # 1:
Car # 2:
Parent Loan (or Parent Loans) for daughter's education
Student Loan (or Student Loans) for her (mother's) education

THEM: Per son’s description and apparently their admission, they have not managed money well. Home foreclosure 2010-2012. Raised 2 sons and a daughter.

THEM: Renting a modest home for $1000-1200 per month.
THEM: Minor health issues. Able to keep working currently. (Will currently known health issues prevent continuing to work in the future?)

HIM: 63yo, 50k income from current employment (Will this employment result in a pension?) (What kind of work does your father do - is it something that is hard on his body?)
HIM: $200/month pension in the near future from old job.
HIM: 17k in a 70/30 401k.
HIM: No other investments

HER: 61yo 30k income from current employment
HER: 22 years into education system and will get a pension on 40k likely, starting around 64-65% if she waits 3 more years. (Currently it’s at 50%). Do she and her employer pay into the Social Security system for her for this job? If not, does she have prior employment that did pay into the Social Security system? What kind of work does she do for the school system - is it something that is hard on her body?
HER: No investments.
I updated the information at the top to reflect the information you required. Let me know if you need more on anything.
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galawdawg
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Re: Seeking feedback to help parents into retirement

Post by galawdawg »

SuperTrooper87 wrote: Wed Feb 17, 2021 4:06 pm UPDATE

As an update to my original post, seeking assistance for my parents.

Gross Income: $85,000-$90,000 combined (approximately $60,000 AGI for tax filing)

Emergency funds:
14,000 in a savings account

Debt:
Car loan - $9,155 @ 5.75%
Student loan - $21,000 @ 4.75% (broken in two loans, $13,000 and $8,000)

....They estimate their yearly expenses to be approximately $30,000-$35,000.


ORIGINAL POST
...They have 18k in consumer debt - 4-6% interest consisting of cars and a school loan from my sister.

...My recommendation to them was to aggressively pay off the consumer debt in the next 6-12 months if possible.
They used a chunk of cash they were sitting on to pay off 10-12k (leaving them with the current 15-20k).
Am I misreading something or did their debt go from $18k in your original post in February to over $30k now??? If so, how did that happen? If not, what was the actual debt balance in February and the actual debt balance now?

If their yearly expenses are $30k-$35k, they have an annual gross income of $85k-$90k and they aren't contributing toward retirement plans, they should have surplus income of at least $2k per month (assuming $7k gross monthly income less $2k taxes less $3k expenses). In the five (5) months since your original post, what happened to that surplus income of $10k or so?
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SuperTrooper87
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Re: Seeking feedback to help parents into retirement

Post by SuperTrooper87 »

galawdawg wrote: Mon Jul 26, 2021 11:51 am
SuperTrooper87 wrote: Wed Feb 17, 2021 4:06 pm UPDATE

As an update to my original post, seeking assistance for my parents.

Gross Income: $85,000-$90,000 combined (approximately $60,000 AGI for tax filing)

Emergency funds:
14,000 in a savings account

Debt:
Car loan - $9,155 @ 5.75%
Student loan - $21,000 @ 4.75% (broken in two loans, $13,000 and $8,000)

....They estimate their yearly expenses to be approximately $30,000-$35,000.


ORIGINAL POST
...They have 18k in consumer debt - 4-6% interest consisting of cars and a school loan from my sister.

...My recommendation to them was to aggressively pay off the consumer debt in the next 6-12 months if possible.
They used a chunk of cash they were sitting on to pay off 10-12k (leaving them with the current 15-20k).
Am I misreading something or did their debt go from $18k in your original post in February to over $30k now??? If so, how did that happen? If not, what was the actual debt balance in February and the actual debt balance now?

If their yearly expenses are $30k-$35k, they have an annual gross income of $85k-$90k and they aren't contributing toward retirement plans, they should have surplus income of at least $2k per month (assuming $7k gross monthly income less $2k taxes less $3k expenses). In the five (5) months since your original post, what happened to that surplus income of $10k or so?
No. I was incorrect In the original post. I hadn’t sat down with the until yesterday to get the full picture. They haven’t added new debt in over a year and have paid down a decent amount in the last 6-12 months (chunk of savings and 1k per month extra payments). Both have a 100k employee sponsored life insurance policy in place. Very cheap for their ages.

You are correct with the 2k savings a month - tho I think they spend more then they were able to estimate. So they’re doing 2 months of tracking everything to see where that discretionary spending really goes.
BarbBrooklyn
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Re: Seeking feedback to help parents into retirement

Post by BarbBrooklyn »

"HIM: FUTURE HOPE OF SETTLEMENT (NOT LISTING THIS AS A CURRENT ASSET): "father just told me he may be coming into an unknown amount of money from the BSoA class action suit. Could be 10k,50k,100k or more." Unknown if, when, and how much if any.

https://www.npr.org/2021/07/01/10123888 ... rs-victims

It seems highly unlikely that your father will see a significant amount of money from this suit against BSA.
BarbBrooklyn | "The enemy of a good plan is the dream of a perfect plan."
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SuperTrooper87
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Re: Seeking feedback to help parents into retirement

Post by SuperTrooper87 »

BarbBrooklyn wrote: Mon Jul 26, 2021 12:05 pm "HIM: FUTURE HOPE OF SETTLEMENT (NOT LISTING THIS AS A CURRENT ASSET): "father just told me he may be coming into an unknown amount of money from the BSoA class action suit. Could be 10k,50k,100k or more." Unknown if, when, and how much if any.

https://www.npr.org/2021/07/01/10123888 ... rs-victims

It seems highly unlikely that your father will see a significant amount of money from this suit against BSA.
Yeah that’s a big unknown. Hence why he’s on board on planning to get $0. That being said, the insurance companies are on the hook for billions to my understanding. After taxes, lawyer fees, etc - id imagine he sees something above nothing. Just no idea how much.
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galawdawg
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Re: Seeking feedback to help parents into retirement

Post by galawdawg »

Based upon all of the information, I'd suggest that they NOT use their modest savings/investments to pay off the car and student loans. They need an emergency fund.

Instead they should cut their spending to the bare minimum and pay the debt off with their surplus income. If they cut current expenses to the bone they could likely have that done in twelve months.
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SuperTrooper87
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Re: Seeking feedback to help parents into retirement

Post by SuperTrooper87 »

galawdawg wrote: Mon Jul 26, 2021 12:25 pm Based upon all of the information, I'd suggest that they NOT use their modest savings/investments to pay off the car and student loans. They need an emergency fund.

Instead they should cut their spending to the bare minimum and pay the debt off with their surplus income. If they cut current expenses to the bone they could likely have that done in twelve months.
With inflation running above 3%, and their loans at 5-6% interest, aren’t they losing 8-10% by just leaving it sitting there? The hope being that the “uncomfortably” low EF as my dad put it would be the reminder to keep spending low. My dad lacks an understanding of all this, luckily my mom doesn’t. What tends to happen is he sees 15-20k in the bank and thinks we’re good to spend more, forgetting at one point they had 3x that in debt or more.

Ultimately if they cashed the IRA in, it’s probably subjected to $2,000-2,500 in taxes. If they took that 15,500-16,000 and $9,100 from savings (leaving a 5k EF), they would be able to pay off the car, and all but 5k in the school loan. They could use that $1,500-2000 in monthly savings to pay off the rest.

By October they could be debt free and saving 2k/mos to beef up the EF. Obviously if a catastrophe occurred prior to that, I am in a position to help. But the hope was to have them learn new habits and get out of the mess they got into.
delamer
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Re: Seeking feedback to help parents into retirement

Post by delamer »

SuperTrooper87 wrote: Mon Jul 26, 2021 3:09 pm
galawdawg wrote: Mon Jul 26, 2021 12:25 pm Based upon all of the information, I'd suggest that they NOT use their modest savings/investments to pay off the car and student loans. They need an emergency fund.

Instead they should cut their spending to the bare minimum and pay the debt off with their surplus income. If they cut current expenses to the bone they could likely have that done in twelve months.
With inflation running above 3%, and their loans at 5-6% interest, aren’t they losing 8-10% by just leaving it sitting there? The hope being that the “uncomfortably” low EF as my dad put it would be the reminder to keep spending low. My dad lacks an understanding of all this, luckily my mom doesn’t. What tends to happen is he sees 15-20k in the bank and thinks we’re good to spend more, forgetting at one point they had 3x that in debt or more.

Ultimately if they cashed the IRA in, it’s probably subjected to $2,000-2,500 in taxes. If they took that 15,500-16,000 and $9,100 from savings (leaving a 5k EF), they would be able to pay off the car, and all but 5k in the school loan. They could use that $1,500-2000 in monthly savings to pay off the rest.

By October they could be debt free and saving 2k/mos to beef up the EF. Obviously if a catastrophe occurred prior to that, I am in a position to help. But the hope was to have them learn new habits and get out of the mess they got into.
You’ve asked several times about using the 401(k) and savings to pay off their debt.

Most responses have said don’t do it, although there have been dissenters.

It seems that you are their backstop in the event of catastrophe regardless of what you/they decide regarding the debt. So if the inflation versus returns versus loan interest is a critical issue for you, then pay off the debt.

I’m skeptical that what you’ve witness recently reflects a real change in their habits. Only time will tell.

Good luck.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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galawdawg
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Re: Seeking feedback to help parents into retirement

Post by galawdawg »

SuperTrooper87 wrote: Mon Jul 26, 2021 3:09 pm
galawdawg wrote: Mon Jul 26, 2021 12:25 pm Based upon all of the information, I'd suggest that they NOT use their modest savings/investments to pay off the car and student loans. They need an emergency fund.

Instead they should cut their spending to the bare minimum and pay the debt off with their surplus income. If they cut current expenses to the bone they could likely have that done in twelve months.
With inflation running above 3%, and their loans at 5-6% interest, aren’t they losing 8-10% by just leaving it sitting there? The hope being that the “uncomfortably” low EF as my dad put it would be the reminder to keep spending low. My dad lacks an understanding of all this, luckily my mom doesn’t. What tends to happen is he sees 15-20k in the bank and thinks we’re good to spend more, forgetting at one point they had 3x that in debt or more.

Ultimately if they cashed the IRA in, it’s probably subjected to $2,000-2,500 in taxes. If they took that 15,500-16,000 and $9,100 from savings (leaving a 5k EF), they would be able to pay off the car, and all but 5k in the school loan. They could use that $1,500-2000 in monthly savings to pay off the rest.

By October they could be debt free and saving 2k/mos to beef up the EF. Obviously if a catastrophe occurred prior to that, I am in a position to help. But the hope was to have them learn new habits and get out of the mess they got into.
Respectfully, advising them to do away with their savings, emergency fund and only investments in order to speed up the debt repayment by a few months is unwise. Likewise, advising them to incur tax liability of $2,000-$2,500 by pulling all of their IRA funds out to payoff $16k of debt carrying 5-6% interest is also unwise. Just do the math. annual Interest on $16k at 6% is just $480.00. You propose they pay over $2k in taxes to save less than $500! Those taxes are more than two (2) years worth of interest payments on ALL of their debt, not just the $16k that the IRA could payoff.

You may need to realize that if your dad can't/won't control spending as part of long-ingrained poor spending habits he has maintained for decades, there is little to nothing you can do about that. Attempting to create a perception that they are "out of money" to control his spending by making ill-advised recommendations concerning savings, an emergency fund and an IRA is not the solution.

As I mentioned, from the information provided, they likely can do a little more belt-tightening and get that $30k or so paid-off in twelve (12) months or less. With gross income of $85k plus and rent of just $1k or so, there is no reason they can't get that paid off post haste with monthly incoming cashflow.

As far as the other concerns, I would recommend:

1. After the debt is paid, suggest that instead of increasing spending back to prior levels they begin/resume contributing to tax-advantaged retirement plans at work to the maximum possible. That will reduce their already low tax burden, will reduce their AGI, and may permit them to qualify for the Saver's Credit if their AGI drops to $66k or less. https://www.irs.gov/retirement-plans/pl ... ers-credit

2. They should both plan to work until age 70. For every year before then that one or both of them retire, they reduce their SS benefits (assuming one or both claims when retired) AND they reduce their retirement contributions. So that is a lose, lose proposition. Lower fixed income and less in their portfolio to draw upon as needed/desired.

Ultimately your parents, as a couple, have to make the decision and commitment now to live well below their means, pay off their debt, maximize contributions to their retirement accounts and work until seventy (if possible). If they are unwilling or unable to make those decisions and commitments, then they simply may need to become accustomed to a much lower standard of living than they would like. Perhaps when your dad turns seventy (only six years away) and your mom's pension has increased to a little over $20k annually, she could retire with him at her age 68 and they could both enjoy a much more comfortable retirement than they otherwise could.
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SuperTrooper87
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Re: Seeking feedback to help parents into retirement

Post by SuperTrooper87 »

galawdawg wrote: Mon Jul 26, 2021 3:40 pm
SuperTrooper87 wrote: Mon Jul 26, 2021 3:09 pm
galawdawg wrote: Mon Jul 26, 2021 12:25 pm Based upon all of the information, I'd suggest that they NOT use their modest savings/investments to pay off the car and student loans. They need an emergency fund.

Instead they should cut their spending to the bare minimum and pay the debt off with their surplus income. If they cut current expenses to the bone they could likely have that done in twelve months.
With inflation running above 3%, and their loans at 5-6% interest, aren’t they losing 8-10% by just leaving it sitting there? The hope being that the “uncomfortably” low EF as my dad put it would be the reminder to keep spending low. My dad lacks an understanding of all this, luckily my mom doesn’t. What tends to happen is he sees 15-20k in the bank and thinks we’re good to spend more, forgetting at one point they had 3x that in debt or more.

Ultimately if they cashed the IRA in, it’s probably subjected to $2,000-2,500 in taxes. If they took that 15,500-16,000 and $9,100 from savings (leaving a 5k EF), they would be able to pay off the car, and all but 5k in the school loan. They could use that $1,500-2000 in monthly savings to pay off the rest.

By October they could be debt free and saving 2k/mos to beef up the EF. Obviously if a catastrophe occurred prior to that, I am in a position to help. But the hope was to have them learn new habits and get out of the mess they got into.
Respectfully, advising them to do away with their savings, emergency fund and only investments in order to speed up the debt repayment by a few months is unwise. Likewise, advising them to incur tax liability of $2,000-$2,500 by pulling all of their IRA funds out to payoff $16k of debt carrying 5-6% interest is also unwise. Just do the math. annual Interest on $16k at 6% is just $480.00. You propose they pay over $2k in taxes to save less than $500! Those taxes are more than two (2) years worth of interest payments on ALL of their debt, not just the $16k that the IRA could payoff.

You may need to realize that if your dad can't/won't control spending as part of long-ingrained poor spending habits he has maintained for decades, there is little to nothing you can do about that. Attempting to create a perception that they are "out of money" to control his spending by making ill-advised recommendations concerning savings, an emergency fund and an IRA is not the solution.

As I mentioned, from the information provided, they likely can do a little more belt-tightening and get that $30k or so paid-off in twelve (12) months or less. With gross income of $85k plus and rent of just $1k or so, there is no reason they can't get that paid off post haste with monthly incoming cashflow.

As far as the other concerns, I would recommend:

1. After the debt is paid, suggest that instead of increasing spending back to prior levels they begin/resume contributing to tax-advantaged retirement plans at work to the maximum possible. That will reduce their already low tax burden, will reduce their AGI, and may permit them to qualify for the Saver's Credit if their AGI drops to $66k or less. https://www.irs.gov/retirement-plans/pl ... ers-credit

2. They should both plan to work until age 70. For every year before then that one or both of them retire, they reduce their SS benefits (assuming one or both claims when retired) AND they reduce their retirement contributions. So that is a lose, lose proposition. Lower fixed income and less in their portfolio to draw upon as needed/desired.

Ultimately your parents, as a couple, have to make the decision and commitment now to live well below their means, pay off their debt, maximize contributions to their retirement accounts and work until seventy (if possible). If they are unwilling or unable to make those decisions and commitments, then they simply may need to become accustomed to a much lower standard of living than they would like. Perhaps when your dad turns seventy (only six years away) and your mom's pension has increased to a little over $20k annually, she could retire with him at her age 68 and they could both enjoy a much more comfortable retirement than they otherwise could.
Fair points and I appreciate the explanation. Should he then look to roll the money over to a ira at fidelity or vanguard in a near term target date fund or TSM?
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galawdawg
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Re: Seeking feedback to help parents into retirement

Post by galawdawg »

Yes, based upon what you posted in your other thread, I'd recommend doing a rollover to Fidelity, Schwab or Vanguard. Then it should be invested according to the appropriate asset allocation for them, which is most certainly not going to be 100% equities. A balanced fund will probably be the best approach for them.

I'd suggest you ask your parents to use the Vanguard tool linked below and let us know what the recommended allocation is for them based upon their responses to the questions in that tool. We can then suggest some low-cost balanced or "all-in-one" index funds that would likely be the most appropriate for them.

https://investor.vanguard.com/calculato ... tionnaire/
Luckywon
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Re: Seeking feedback to help parents into retirement

Post by Luckywon »

galawdawg wrote: Mon Jul 26, 2021 3:40 pm
Likewise, advising them to incur tax liability of $2,000-$2,500 by pulling all of their IRA funds out to payoff $16k of debt carrying 5-6% interest is also unwise. Just do the math. annual Interest on $16k at 6% is just $480.00. You propose they pay over $2k in taxes to save less than $500! Those taxes are more than two (2) years worth of interest payments on ALL of their debt, not just the $16k that the IRA could payoff.
Respectfully, I believe this analysis is incomplete. It strongly implies that the taxes paid on IRA withdrawals are an excess expense that should be accounted against savings in debt service. This ignores the fact, given pension and SS information provided earlier, that the father will most likely be paying at least 12% tax whenever the IRA is withdrawn. Given that taxation on the IRA is highly likely to be the same whether withdrawn now or later, in my opinion it is best to leave taxes out of the calculations and decision.

OP, an emergency fund is nice, but in my opinion is something that should be built up from income, rather than something created or maintained by taking out debt or avoiding paying off debt (which in my mind are roughly equivalent actions). This is even more so when interest on the debt is not tax deductible. I believe that the car loan debt of $9k would not be deductible but student loan debt might be deductible. I'd suggest your parents at least paying off the car loan debt from either existing funds or a portion of the IRA. From an income standpoint, paying off that car loan is equivalent to acquiring a risk free tax free bond paying 5.75 %. I'd have to have a very good reason to pass on that and keeping an emergency fund does not pass muster for me.
Last edited by Luckywon on Tue Jul 27, 2021 12:36 am, edited 1 time in total.
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SuperTrooper87
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Re: Seeking feedback to help parents into retirement

Post by SuperTrooper87 »

Luckywon wrote: Mon Jul 26, 2021 11:27 pm
galawdawg wrote: Mon Jul 26, 2021 3:40 pm
Likewise, advising them to incur tax liability of $2,000-$2,500 by pulling all of their IRA funds out to payoff $16k of debt carrying 5-6% interest is also unwise. Just do the math. annual Interest on $16k at 6% is just $480.00. You propose they pay over $2k in taxes to save less than $500! Those taxes are more than two (2) years worth of interest payments on ALL of their debt, not just the $16k that the IRA could payoff.
Respectfully, I believe this analysis is incomplete. It strongly implies that the taxes paid on IRA withdrawals are an excess expense that should be accounted against savings in debt service. This ignores the fact, give pension and SS information provided earlier, that the father will most likely be paying at least 12 % tax whenever the IRA is withdrawn. It's not a certainty, but it appears to me they will remain well into the 12 % bracket. Given that taxation on the IRA is highly likely to be the same whether withdrawn now or later, in my opinion it is best to leave taxes out of the calculations and decision.

OP, an emergency fund is nice, but in my opinion is something that should be built up from income, rather than something created or maintained by taking out debt or avoiding paying off debt (which in my mind are roughly equivalent actions). This is even more so when interest on the debt is not tax deductible. I believe that the car loan debt of $9k would not be deductible but student loan debt might be deductible. I'd suggest your parents at least paying off the car loan debt from either existing funds or a portion of the IRA. From an income standpoint, paying off that car loan is equivalent to acquiring a risk free tax free bond paying 5.75 %. I'd have to have a very good reason to pass on that and keeping an emergency fund does not pass muster for me.
Similar thought process. The 12% bracket may not last forever correct?
Luckywon
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Re: Seeking feedback to help parents into retirement

Post by Luckywon »

SuperTrooper87 wrote: Tue Jul 27, 2021 12:07 am Similar thought process. The 12% bracket may not last forever correct?
It's easy to imagine circumstances either way where they (or a surviving spouse) may be paying less or more in taxes. In my opinion, a good assumption, for planning purposes, is that they will be paying around the same.
toblerone
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Re: Seeking feedback to help parents into retirement

Post by toblerone »

SuperTrooper87 wrote: Tue Jul 27, 2021 12:07 am
Luckywon wrote: Mon Jul 26, 2021 11:27 pm
galawdawg wrote: Mon Jul 26, 2021 3:40 pm
Likewise, advising them to incur tax liability of $2,000-$2,500 by pulling all of their IRA funds out to payoff $16k of debt carrying 5-6% interest is also unwise. Just do the math. annual Interest on $16k at 6% is just $480.00. You propose they pay over $2k in taxes to save less than $500! Those taxes are more than two (2) years worth of interest payments on ALL of their debt, not just the $16k that the IRA could payoff.
Respectfully, I believe this analysis is incomplete. It strongly implies that the taxes paid on IRA withdrawals are an excess expense that should be accounted against savings in debt service. This ignores the fact, give pension and SS information provided earlier, that the father will most likely be paying at least 12 % tax whenever the IRA is withdrawn. It's not a certainty, but it appears to me they will remain well into the 12 % bracket. Given that taxation on the IRA is highly likely to be the same whether withdrawn now or later, in my opinion it is best to leave taxes out of the calculations and decision.

OP, an emergency fund is nice, but in my opinion is something that should be built up from income, rather than something created or maintained by taking out debt or avoiding paying off debt (which in my mind are roughly equivalent actions). This is even more so when interest on the debt is not tax deductible. I believe that the car loan debt of $9k would not be deductible but student loan debt might be deductible. I'd suggest your parents at least paying off the car loan debt from either existing funds or a portion of the IRA. From an income standpoint, paying off that car loan is equivalent to acquiring a risk free tax free bond paying 5.75 %. I'd have to have a very good reason to pass on that and keeping an emergency fund does not pass muster for me.
Similar thought process. The 12% bracket may not last forever correct?
I agree with galawdawg, $480 per year of debt service is not an emergency I would drain the IRA accounts for, in this situation, especially if they can kill the debt in a year with cash flow. Paying tax now costs a lot more than paying the tax 5 or 10 years from now. It also sets a bad example to the spendthrift father, that draining the IRA is a good solution to a debt problem.
Luckywon
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Re: Seeking feedback to help parents into retirement

Post by Luckywon »

toblerone wrote: Tue Jul 27, 2021 12:41 am Paying tax now costs a lot more than paying the tax 5 or 10 years from now.
This is very unlikely to be true in this case.
toblerone wrote: Tue Jul 27, 2021 12:41 am It also sets a bad example to the spendthrift father, that draining the IRA is a good solution to a debt problem.
To me it is strange to hear staying in debt described as being more financially responsible than paying off debt.

One reasonable argument I've heard here for avoiding paying off the debt is to keep some liquidity. But I am also seeing suggestions to invest the IRA in a balanced fund. An emergency fund, to my understanding, should be held in cash, not invested in equities.

In a bear market, if the IRA is in a 50/50 fund, your father could easily lose 25% or more of his IRA. And he would remain in debt. Considering all this, I do not think it prudent for your father to keep an IRA invested in a balanced fund in favor of paying off consumer debt.
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SuperTrooper87
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Re: Seeking feedback to help parents into retirement

Post by SuperTrooper87 »

Luckywon wrote: Tue Jul 27, 2021 12:58 am
toblerone wrote: Tue Jul 27, 2021 12:41 am Paying tax now costs a lot more than paying the tax 5 or 10 years from now.
This is very unlikely to be true in this case.
toblerone wrote: Tue Jul 27, 2021 12:41 am It also sets a bad example to the spendthrift father, that draining the IRA is a good solution to a debt problem.
To me it is strange to hear staying in debt described as being more financially responsible than paying off debt.

One reasonable argument I've heard here for avoiding paying off the debt is to keep some liquidity. But I am also seeing suggestions to invest the IRA in a balanced fund. An emergency fund, to my understanding, should be held in cash, not invested in equities.

In a bear market, if the IRA is in a 50/50 fund, your father could easily lose 25% or more of his IRA. And he would remain in debt. Considering all this, I do not think it prudent for your father to keep an IRA invested in a balanced fund in favor of paying off consumer debt.
The bear market possibility is what I was thinking of. Because if he leaves the Ira and pays debt with savings and cash flow, market tanks and now emergency happens - he has to drawn off a depleted ira.

I don’t see them ever being below a 12% bracket
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galawdawg
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Re: Seeking feedback to help parents into retirement

Post by galawdawg »

Luckywon wrote: Tue Jul 27, 2021 12:58 am
toblerone wrote: Tue Jul 27, 2021 12:41 am
toblerone wrote: Tue Jul 27, 2021 12:41 am It also sets a bad example to the spendthrift father, that draining the IRA is a good solution to a debt problem.
To me it is strange to hear staying in debt described as being more financially responsible than paying off debt.

One reasonable argument I've heard here for avoiding paying off the debt is to keep some liquidity. But I am also seeing suggestions to invest the IRA in a balanced fund. An emergency fund, to my understanding, should be held in cash, not invested in equities.

In a bear market, if the IRA is in a 50/50 fund, your father could easily lose 25% or more of his IRA. And he would remain in debt. Considering all this, I do not think it prudent for your father to keep an IRA invested in a balanced fund in favor of paying off consumer debt.
1. Nobody is suggesting that the parents should be "staying in debt". The debt load of the parents, when viewed as a function of their annual income, is modest. When you look at the annual income less the annual expenses reported by OP, the payoff period is about fifteen (15) months. I suggest that with some belt tightening (cut cable, subscriptions, change to $20/mo MVNO cellphone plans, reduce or eliminate dining out/Starbucks/purchased lunches, and so on), they can likely have it paid off in one year. If they are really committed, they could have it paid off in nine (9) months or less.

2. Perhaps you overlooked the plan by OP to eliminate BOTH the emergency fund AND the IRA in order to payoff the debt. My points are that they need an emergency fund AND it is foolish to liquidate the IRA and pay at least $2k in taxes to eliminate only half of their current debt six to twelve months early which, at most, costs $480/yr in interest. Eliminating the IRA also eliminates the growth that may result from keeping those funds fully invested in a tax advantaged account. Eliminating all liquid assets as you propose is not a wise option. The minute they have an unexpected expense, such as the HVAC failing or the car needing new brakes, they'll be right back in consumer debt since they won't have the cash to pay for it.

3. I'm not sure why you note that in a bear market, the OP's father "would remain in debt". A bear market which reduces his IRA balance would have zero effect upon his ability to payoff the debt through surplus monthly cashflow if he is disciplined about it. And if he is not disciplined about it then, as toblerone noted, using the IRA to payoff the debt reinforces the notion that one should simply drain retirement accounts as needed to payoff debt rather than control spending and avoid unwise consumer debt.

But as I said, all of this is just a band-aid if the OP's parents can't/won't control their spending and maintain good financial discipline.
dknightd
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Re: Seeking feedback to help parents into retirement

Post by dknightd »

SuperTrooper87 wrote: Tue Jul 27, 2021 1:42 am I don’t see them ever being below a 12% bracket
You are probably right. But I did not carefully crunch the numbers since we are not really sure yet what the numbers are. And it is better for you and them to crunch the numbers together.

What I'd probably do if I found myself in your parents situation would be to find a new vendor for the existing rollover IRA.
I'd look at the big 3 (vanguard, fidelity, Schwab), but since your mom is in education she might also have access to TIAA, and if she has access, I think he does as well. Most of tiaa IRA offerings are not very good, but, they do offer a 1% guaranteed account that might serve their purposes. It is at least better than a savings account - perhaps. Probably at the noise level at this point, but worth looking in to. I mention schwab specifically since a friend of mine likes them (apparently they have decent investment options, decent web page, and an actual office in some towns). Full disclosure, all my money is in TIAA - perhaps not the best place for it, but for now it works fine. Your parents might like to have a local office in case they want to walk in the door . . .

Once I had identified a new vendor for my IRA, I would pay off the car loan and rollover the rest. This does two things. 1) I've found a better IRA custodian, 2) I've paid off the higher interest loan,

You, and your parents, still have 3 big unknowns in my mind.
1) does your dad's pension from his old job increase the longer he waits. It is not a huge amount of money, but every penny helps.
2) does your Mom's current job exclude part of her potential SS income. They/you need to figure this out. I'm not an expert, but my understanding is if they are taking SS tax from her income now, then that income will qualify later. If she is not paying SS tax now, that will reduce or eliminate that income source. This is an important thing to find out.
3) Your Mom's benefits might be very important. Some school districts offer good benefits. Including health care benefits. You want to maximize those. I'd suggest a visit with the benefits advisor if they have one. One question to ask, are retirement benefits based on last three years salary, or, highest three year salary?

I suspect your parents are asking for your help in two ways.
1) help us figure out what we should do.
2) help us in our old age, since we helped you out when you were young.

You might have to help them in their latter years. If that happens I'd ask my siblings to help out as well. My parents supported me for 18 years. I appreciate that. I hope I never have to ask my kids to help support me. Perhaps that should be your goal?
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
backpacker61
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Re: Seeking feedback to help parents into retirement

Post by backpacker61 »

I have some relatives that are a lot like your father. Whenever they would get a small windfall of any kind, or a lump sum of savings accumulates, they seemingly couldn't sit still until they had spent it on some kind of sparkley thing (boat, RV, sound system, whatever).

What did save them in the end was a job with a pension. They were never offered a "lump sum versus annuity" choice in those days (any lump sum in their hands would have been a disaster). It's important to recognize that your parents' most valuable assets are their accumulated Social Security benefits and the DB pensions they qualify for. At this point in their lives, the IRA, 401K, and 403B are window dressing (although they should still try to maximize them as much as they can).

Work with them to create a login and password on the 'my Social Security" portal. Download and review their earnings histories and anticipated benefit levels. Add up the non-zero entries to ensure there are at least 35; preferably 35 entries representing full time work. Use the 'open Social Security" tool created by Mike Piper (great guy who posts here on Bogleheads) to study the recommended claiming options.

https://opensocialsecurity.com/

For the DB pensions, review if they can get any increase in benefit levels by delaying filing to age 72, which could also help a lot.

Your parents aren't unusual in this respect; most elderly Americans are almost wholly dependent on their Social Security benefit, and regretfully, most file for it at 62, which is about the worst option. Your folks are fortunate to also qualify for some pension income.
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delamer
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Re: Seeking feedback to help parents into retirement

Post by delamer »

backpacker61 wrote: Tue Jul 27, 2021 6:31 am I have some relatives that are a lot like your father. Whenever they would get a small windfall of any kind, or a lump sum of savings accumulates, they seemingly couldn't sit still until they had spent it on some kind of sparkley thing (boat, RV, sound system, whatever).

What did save them in the end was a job with a pension. They were never offered a "lump sum versus annuity" choice in those days (any lump sum in their hands would have been a disaster). It's important to recognize that your parents' most valuable assets are their accumulated Social Security benefits and the DB pensions they qualify for. At this point in their lives, the IRA, 401K, and 403B are window dressing (although they should still try to maximize them as much as they can).

Work with them to create a login and password on the 'my Social Security" portal. Download and review their earnings histories and anticipated benefit levels. Add up the non-zero entries to ensure there are at least 35; preferably 35 entries representing full time work. Use the 'open Social Security" tool created by Mike Piper (great guy who posts here on Bogleheads) to study the recommended claiming options.

https://opensocialsecurity.com/

For the DB pensions, review if they can get any increase in benefit levels by delaying filing to age 72, which could also help a lot.

Your parents aren't unusual in this respect; most elderly Americans are almost wholly dependent on their Social Security benefit, and regretfully, most file for it at 62, which is about the worst option. Your folks are fortunate to also qualify for some pension income.
While I don’t disagree with your overall point, you overstated the how much seniors depend on Social Security:
Social Security provides the majority of income to most elderly Americans. For about half of seniors, it provides at least 50 percent of their income, and for about 1 in 4 seniors, it provides at least 90 percent of income, across multiple surveys and the study that matches survey and administrative data.
https://www.cbpp.org/research/social-se ... l-security

I raise this because while it is true that Social Security is critical for keeping seniors out of poverty, it’s misleading to imply that most seniors have no other income. Most people can and do prepare for their retirement by developing other income sources.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Herekittykitty
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Re: Seeking feedback to help parents into retirement

Post by Herekittykitty »

Thanks for updating your original post. Just looking the debt part of it:

For each loan, write in the minimum monthly payment and the expected payoff date at the minimum monthly payment.

Car Loan: $9,155 @ 5.75%
Student Loan #1: $8,000 @ 4.75%
Student Loan #2: $13,000 @ 4.75%

TOTAL DEBT: $30,155

The requested information will help us advise you better as to whether any should be paid off sooner than scheduled and if so, what order that should go for maximum benefit.

I would like to reinforce that no, they shouldn't cash out or withdraw anything to pay off the debt. And they shouldn't sell anything (except unused household items, clothes, furniture, and so on that they do not want or need and do not intend to replace) to pay their debt off. They can pay it off by organizing their finances and getting on a budget and paying the debt off from their income.

(I would also reinforce that the sooner your parents set up Social Security accounts and look at their earnings histories and the sooner your mother finds out whether her Social Security benefits are subject to reduction due to her and her employer not paying into Social Security during any of her working years, the more we can help you help them. These questions are very important which is why so many of us keep bringing them up.)

It is good to see your parents willing to track their spending. It is a good and necessary first step. I believe it is possible to teach old dogs new tricks. Not guaranteed, but possible.

Kudos to you. Keep at this.
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