Advice for a retiring father

[nolamd84]

Hey everyone - long time reader but never submitted a comment. Question about my father.

He's a practicing psychiatrist who is getting near retirement. I took a minute to analyze his retirement accounts and it seems that he has accidentally ended up with a very good retirement plan. Here are some broad details of his investments:

1. $650k invested in index funds

2. A $400k payment that is coming to him, tax free, from a state retirement deferral plan

3. $80k annually in pension for perpetuity starting now (also in perpetuity for mom if he passes away)

4. He should get about $35k annually in social security in about 5 years

He lives in a low cost area of the country with house paid off, cars paid off, no major expenses, etc.

He's retiring from his state job this year so he can start getting his state pension (he has state and private jobs) and is transitioning to full-time private for the next five years and his goal is to fully retire in 5 years.

My question is kind of broad - what should he do to streamline his income for retirement? My uncle uses a "financial guy" who I'm pretty sure is taking advantage of him. I'm urging my dad to use a fee only financial planner, but I'm struggling with some recommendations for one. I know the WCI has a list that he recommends, but I'm a little overwhelmed.

Any thoughts? Advice?

Much appreciated in advance.

 

[jfoxcpacfp]

At first blush, it appears that your parents are in pretty solid financial shape. However, there is more to the picture such as debt, long-term goals, whether he has LTCI (Long-Term Care Insurance), ages, etc., etc. Will he wait until 70 to begin taking SS? Is there a WEP offset for his pension from SS?

Could you clarify what you mean by "streamline his income for retirement"?

I agree that meeting with a fee-only financial planner could be a huge benefit to them. You should seek a planner who prioritizes the plan first, using the plan to guide portfolio recommendations. Most financial planners offer free initial consultations, really nothing to lose. If you haven't yet gotten a copy, my Guide for Established Attendings/Pre-Retirement has a lot of good information.

[PhysicianOnFIRE]

Johanna's got some good questions. I don't know what your father's desires are, but with over $1 million and an $80,000 a year pension, living debt-free in a low cost of living area, plus $35,000 in SS eventually (what about spousal SS?) he is in really good shape right now.

If he's working another 5 years because he loves the job, that's awesome. If he's doing it because he's worried about not having enough money, I would be sure he understands that you need enough to cover your annual expenses in retirement, not some percentage of your income.

Currently, with the pension and a 4% withdrawal rate on the $1 million+, your parents can spend over $100,000 a year in perpetuity. When they take SS, it will be closer to $150,000 a year. A couple can live quite well on a budget like that. If you think someone is taking advantage of him, try to get as much detail as you can. Feel free to share information here if you feel comfortable.

Best,

-PoF

[nolamd84]

Thanks for the advice -

1. Good thought about long-term care insurance. The way our family is, it is very unlikely that we would use a nursing home but I believe it would help if we needed home health care nurses, etc.

2. He is about two months away from 0 debt.

3. I guess by streamlining his income I mean trying to figure out how much he should withdraw a month and through what sources. Should he use this five years to account for how much his expenses actually are? In general they don't spend much but they have occasional vacations that can be pricey and as we get older, gifts for their grandchildren, etc.

4. Thanks for the link for the guide - he's not being taken advantage of at all but we're both wary of it. My uncle is likely being taken advantage of but overall its likely a small percentage of his take home.

5. He's working more because he loves it and, although I told him we don't need it, I think he wants to leave an inheritance for us.

 

[AlexxT]

nolamd84 wrote:

1. Good thought about long-term care insurance. The way our family is, it is very unlikely that we would use a nursing home but I believe it would help if we needed home health care nurses, etc.

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The use of a nursing home is almost never optional.   Saying that it's "unlikely that we would use a nursing home" is the same as saying "it's unlikely that we would use surgery".

[nolamd84]

Point taken.

[jfoxcpacfp]

nolamd84 wrote:

3. I guess by streamlining his income I mean trying to figure out how much he should withdraw a month and through what sources. Should he use this five years to account for how much his expenses actually are? In general they don’t spend much but they have occasional vacations that can be pricey and as we get older, gifts for their grandchildren, etc.

Click to expand...

Here's kind of an abbreviated version of how it works in a financial planning engagement:

1. We ask client to estimate what they will need to live on in retirement, adjusting for expenses that will go away (work clothes, commuting costs, club memberships, eating out - whatever). Monthly expenses are the foundation of cash outflow and we project annual costs, inflation-adjusted, forward between today and end of average lifespan, taking into account health issues and genetics.


2. We also get an estimate of living expenses for each spouse after the death of the other and include those as options.


3. We then get an estimate of short- and long-term goals and enter those as reductions based on the spending timeline, all in today's dollars and inflated for future. Ex: vehicle replacement every 7 years @$30k per in today's dollars, trip of a lifetime $35k in 5 years to celebrate retirement, daughter's wedding in 2 years, etc. Each goal is classified between "must have", "nice to have", etc.


4. All available resources are entered and classified among "short-term" spending and "long-term" growth needed and "not used in plan". If they will be used in the plan, they will be available for living expenses, etc. (SS, IRAs, etc.) If not (family home), they will be illustrated as an asset of the estate.


5. Estimated taxes are accounted for.


6. The difference shows what you can expect to have at the end of your lives or the dollar amount of changes you need to make now to be able to accomplish your goals. (Obviously, the sooner this is done, the better.)


7. The plan is adjusted on an ongoing basis - dynamic, in real time - as the client's situation changes (retire a year earlier than planned, inherit money, stock market losses, etc.) As goals come and go, we are no longer estimating but adjusting for real results. We also run various "what if" scenarios showing how various choices will affect the client's wealth and available resources throughout the process.

This is a very basic, generalized planning process your dad might experience with a fee-only financial planner and how "streamlining income" (and other concerns) might be addressed.

 

[The White Coat Investor]

nolamd84 wrote:

Hey everyone – long time reader but never submitted a comment. Question about my father.

He’s a practicing psychiatrist who is getting near retirement. I took a minute to analyze his retirement accounts and it seems that he has accidentally ended up with a very good retirement plan. Here are some broad details of his investments:

1. $650k invested in index funds

2. A $400k payment that is coming to him, tax free, from a state retirement deferral plan

3. $80k annually in pension for perpetuity starting now (also in perpetuity for mom if he passes away)

4. He should get about $35k annually in social security in about 5 years

He lives in a low cost area of the country with house paid off, cars paid off, no major expenses, etc.

He’s retiring from his state job this year so he can start getting his state pension (he has state and private jobs) and is transitioning to full-time private for the next five years and his goal is to fully retire in 5 years.

My question is kind of broad – what should he do to streamline his income for retirement? My uncle uses a “financial guy” who I’m pretty sure is taking advantage of him. I’m urging my dad to use a fee only financial planner, but I’m struggling with some recommendations for one. I know the WCI has a list that he recommends, but I’m a little overwhelmed.

Any thoughts? Advice?

Much appreciated in advance.

 

Click to expand...

The good news is that he's going to do fine. Sounds like something like $150K in retirement income to me. Should be plenty considering a typical psychiatrist salary.

Just go with him to the appt with the planner to make sure he's not getting hosed.

[AlexxT]

jfoxcpacfp wrote:

vehicle replacement every 7 years @$30k per in today’s dollars, trip of a lifetime $35k in 5 years to celebrate retirement, daughter’s wedding in 2 years, etc.

Click to expand...

This is really good advice for everyone.

I was told that the expenditures that most retirees are most likely to fail to adequately budget for are new cars, home repairs, health care costs, and travel.   Weddings should be added in there as well, plus any other child or grandchild related expenses.

[Hatton]

If you think about that pension he has the equivalent of 3 mill in retirement savings plus SS.  His house and cars are paid for.  It is also fabulous that the pension continues even if he dies.  He may be happier in retirement than those of us who are trying to figure out which account to draw down etc.

[potbellypigger]

Johanna, can you help us define fee only financial planner.  I was under the impression you pay them hourly.  Not sure if this is what people are thinking when they refer to fee only financial planner.  Read a book mentioned on WCI and contacted the financial planner and they are fee only but charge 1% aum, and will place your money in vanguard funds.  Not sure Jim would approve of this.  However according to this link, fee only financial planning has many different models.  Using a AUM model may not be the most cost effective to maximize returns.  http://www.napfa.org/membership/TransitioningtoFeeOnly.asp

[jfoxcpacfp]

potbellypigger wrote:

Johanna, can you help us define fee only financial planner.  I was under the impression you pay them hourly.  Not sure if this is what people are thinking when they refer to fee only financial planner.  Read a book mentioned on WCI and contacted the financial planner and they are fee only but charge 1% aum, and will place your money in vanguard funds.  Not sure Jim would approve of this.  However according to this link, fee only financial planning has many different models.  Using a AUM model may not be the most cost effective to maximize returns.  http://www.napfa.org/membership/TransitioningtoFeeOnly.asp

Click to expand...

Yes, fee-only does have many models. The concept of fee-only is that the advisor is paid only by the client and is not paid by any outside parties for getting a piece of the client's business. Iow, the client can be assured that (s)he is not being put into funds or referred to outside parties (insurance salespeople, attorneys, CPAs, etc) for which the advisor would receive remuneration, which would be a conflict of interest. For example, mutual fund companies typically pay huge fees to advisors, along with soft-dollar compensation such as lavish trips, for advisors to use their products for their clients.

Fee-only planners explain exactly how they charge and the client gets to decide whether or not that model is for them - full disclosure. If you don't believe AUM is the most cost effective, at least you are making the decision based on all the facts. You are in the driver's seat, so to speak.

Actual financial planning is usually lost in this discussion. A true financial planner works to help the client achieve their goals with a cohesive, integrated plan spanning a lifetime. The investments are only piece of the puzzle, not the puzzle itself. Because traditional brokers, many of whom refer to themselves as "advisors" and "planners" focus on product sales, consumers are confused into believing that this is what financial planning is. In reality, financial planning may or may not include investment management. Our job is to employ all of your resources, both current and future, in their best use in accomplishing your short- and long-term goals. That is financial planning.