Helping Dad (MD) Retire

[AdamMGrossman]

1. The annuity does not seem like a good solution.  The embedded fees are high, and I'm not sure that it would even solve your Dad's problem, which is that his expenses are too high relative to his assets.

2. I can address the family dynamics: In my experience, parents tend not to listen to children in these cases.  No one likes to hear that they need to cut back on their lifestyle, especially when that message is coming from a child.  I have experienced this in my own family and seen it with clients.  It's just an unfortunate fact.  In general, parents will only start listening when things have reach crisis-level, but of course you want to avoid that.  An alternative would be to bring in a third party to help you communicate with your father in a way that is both empathetic but also quantitative/logical.  That could be an accountant or a lawyer or a financial planner (not an annuity salesman, but a real planner), or even a social worker.  It needs to be someone well versed in the numbers and also well versed in family dynamics.  It needs to be someone who won't just point at numbers on paper but who will also understand the underlying reasons why he won't sell the big house or leave the country club, for example.

Just today I played that role for a client, and I can tell you a little bit about what it looked like.  I spent two hours in a house just like yours -- a divorced parent around the same age together with a concerned child.  Going into the meeting, the child was really nervous, not knowing how the parent would react.  But, it really seemed to help to have an independent person in the room providing the child with back-up, confirming what the child had been telling the parent.  Importantly, I (and the child) didn't dictate any solutions; instead, we just offered alternatives: work part-time, trim expenses (no need to live like a pauper, just cut something), put the vacation house on Airbnb, put idle cash into short-term bonds (not bond funds, but individual bonds, and hold to maturity).  I had lots of numbers on paper, but I also spent a lot of time just talking with the parent, exploring solutions and generally being supportive of the very difficult situation.

Another suggestion: try to meet with your siblings and see if you can get them on the same page.  You definitely don't want to gang up on your Dad, but at the same time, if you are all on the same page, then you can deliver a consistent message, and that will definitely help.  In my experience, when each child has a different opinion (e.g., hold the house but quit the club or vice versa), and is communicating it separately to the parent, then the parent really won't make any progress.

You shouldn't expect to solve this overnight, but with a combined effort, and over time, I am confident you'll get there.  Good luck.

[The White Coat Investor]

The annui

AdamMGrossman wrote:

1. The annuity does not seem like a good solution.  The embedded fees are high, and I’m not sure that it would even solve your Dad’s problem, which is that his expenses are too high relative to his assets.

2. I can address the family dynamics: In my experience, parents tend not to listen to children in these cases.  No one likes to hear that they need to cut back on their lifestyle, especially when that message is coming from a child.  I have experienced this in my own family and seen it with clients.  It’s just an unfortunate fact.  In general, parents will only start listening when things have reach crisis-level, but of course you want to avoid that.  An alternative would be to bring in a third party to help you communicate with your father in a way that is both empathetic but also quantitative/logical.  That could be an accountant or a lawyer or a financial planner (not an annuity salesman, but a real planner), or even a social worker.  It needs to be someone well versed in the numbers and also well versed in family dynamics.  It needs to be someone who won’t just point at numbers on paper but who will also understand the underlying reasons why he won’t sell the big house or leave the country club, for example.

Just today I played that role for a client, and I can tell you a little bit about what it looked like.  I spent two hours in a house just like yours — a divorced parent around the same age together with a concerned child.  Going into the meeting, the child was really nervous, not knowing how the parent would react.  But, it really seemed to help to have an independent person in the room providing the child with back-up, confirming what the child had been telling the parent.  Importantly, I (and the child) didn’t dictate any solutions; instead, we just offered alternatives: work part-time, trim expenses (no need to live like a pauper, just cut something), put the vacation house on Airbnb, put idle cash into short-term bonds (not bond funds, but individual bonds, and hold to maturity).  I had lots of numbers on paper, but I also spent a lot of time just talking with the parent, exploring solutions and generally being supportive of the very difficult situation.

Another suggestion: try to meet with your siblings and see if you can get them on the same page.  You definitely don’t want to gang up on your Dad, but at the same time, if you are all on the same page, then you can deliver a consistent message, and that will definitely help.  In my experience, when each child has a different opinion (e.g., hold the house but quit the club or vice versa), and is communicating it separately to the parent, then the parent really won’t make any progress.

You shouldn’t expect to solve this overnight, but with a combined effort, and over time, I am confident you’ll get there.  Good luck.

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The annuity solves two issues- the parent won't run out of money completely (at a bare minimum he'll have SS and the annuity payment) and the parent will be able to spend a higher percentage of the assets he does have (since a SPIA at 73 pays way more than 4%). I think dismissing it out of hand because the insurance costs something is probably the wrong move. 

[DC Doc]

The annuity payout rate is about 7%, at least the one we were looking at.

[Medikit]

I'm actually going through the same thing with my parents. My Father is a dentist and they did not have a good financial adviser. Approximately 3 years ago my Father who is now 65 mentioned that he was interested in retiring but that it didn't seem possible. He had saved very little retirement but fortunately his there is quite a bit of value in his dental practice. First we created a 401k with profit sharing so that he could try to beef up his savings a little while we listed his practice. When we do sell his practice I am suggesting that they consider a SPIA- and after reading William Bernstein's Deep Risk I'm actually interested in inflation protected SPIA (this is not a very popular product and few companies hold this product).

 

Any thoughts on inflation protected SPIA? You take a hit on how much you earn per month but since a SPIA is basically a bet that you will live until you are 90 shouldn't you also bet on inflation?

[Dreamgiver]

I couple of things that jump to mind for me...

Most people do not divorce at 70. Have you considered the fact that he might be developing dementia? If so, he needs all the help he can get from you. If, on the other hand, that is not the case, and especially if he divorced your mom, his sorry a$$ is on the street as far as I'd be concerned. (I am italian, you do not mess around with moms).  

[AdamMGrossman]

I should have quantified my statement about the annuity option. I definitely appreciate the benefits of a guaranteed paycheck, but here's what I was thinking in suggesting that he not go the annuity route:

Assets

The retiree has approx $1.2 million to work with.

Expenses

His son stated that his expenses are $10,500 per month.  He listed the big items:

Primary home expenses: $3.5k/month

Travel to summer home $6k/yr, or $500/month

Caretaker $10k/yr, or $833/month

Cub fees $5k/yr., or $416/month

That only adds up to $5,250 per month.  So, it's possible, as the son suggests, that the father's expenses are lower than he is estimating.  But, since he's stated $10,500, that was what I used in my calculation.

Annuity proposal

The proposal is to take $750k and annuitize for a 7% payout. That would be $52,500 per year or $4,375 per month.

He could then invest the other $500,000, and as you say, draw on it more aggressively.

How this works out

Total monthly expenses: $10,500

Minus annuity: ($4,375)

Minus Social Security est. after-tax: ($3,000)

Equals spending that he would need to cover from the remaining $500k portfolio: $3,125 per month (or, $37,500 per year) 

It was these numbers that concerned me.  After annuitzing more than 60% of his money, he would be in a tough spot with the remaining $500,000.  On the one hand, he would want to try to get a little return so it will grow, providing protection against inflation for maybe two decades into the future. But, on the other hand, with just $500,000, and the stock market near all-time highs, I would be concerned about taking on too much risk, especially given the father's risk-averse nature.  That's why I felt like it would be better to keep the entire $1.2M under his control.  That much larger portfolio would allow him to take a little risk and maybe stretch the money further.

To annuitize or not is definitely a judgment call. Either way, however, it seems like the bigger issue is the $10,500 in spending, and the annuity doesn't solve that.  If the Dad could cut that back, though, this would become a much easier problem to solve.

I see three open questions for the son to help narrow in on a decision:

1. Can you double check that $10,500?  Maybe attach his bank account to Mint or Quicken, or just go through a year's worth of bank statements and look at the total outflows.

2. What will be the tax drag on that $1.2M?  It wasn't clear to me whether that $1.2M is in an IRA or a taxable account.  If it's in an IRA, the taxes are easy to estimate.  If it's in a taxable account, you'd want to know the unrealized gains.

3. How many years are left on the mortgage?

 

 

[q-school]

My parents made miserable financial decisions that were contrary to their stated goals right until time dad passed. I support both sets of parents as well as my kids in lavish (relatively speaking) lifestyle. There is no housing or food insecurity. Plenty of wonderful vacations. Walking around money.

Someday when my kids come to me with their concerns about how I’m spending my money I’m going to tell them to kiss my @ss.

I hope you can maintain your relationship with your parents through all this. It’s hard for people who are logical and careful planners and yes somewhat controlling to manage these waters. Despite it all, I miss my dad every day. Best wishes to manage through the turmoil. Hope you can remember some of the Good times during the difficult emotional conversations.

Ymmv.

[jfoxcpacfp]

q-school, your parents might not have been the best at money decisions, but it sounds like they were awesome at raising children.

[Kamban]

q-school wrote:

My parents made miserable financial decisions that were contrary to their stated goals right until time dad passed.

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My FIL is also a terrible financial planner and decision maker. He is clueless about the cost of things and saving money for a retirement. His answer is that there will be money somehow. Luckily he worked for thr government and has a small pension plan. But the greatest thing he did in life was to marry my MIL who was the financial backbone of the family and ran the house so that three girls could be well educated and be settled in life.

Even now he has the same lackadaisical attitude to money. This infuriates my wife and sometimes they openly disagree. But I tell my wife that they have brought her and sisters up well and it is time we did something for them. Let them enjoy their life and spend a little on themselves and we can certainly afford that for them. If we can't take care of our own parents who are we going to take care of in life. When they pass away I want the good memories we had with them and not that we have $100K more in our retirement because we were penny pinchers.

I understand that the family dynamics are different for different families but in our case we have prioritized family over extra savings..

[StarTrekDoc]

My parents put three kids through private school and college - we siphoned a lot of their funds.   Now into their 80s, he's not the best choices in investment, but no vices---except his constant lovefest for Put options.  

He made awful whole life annuity decisions and made a very bad real estate play on his IRA -- but doing okay now that we've settled most of his accounts into a steady state and minimize his put option play to a single speculation account.

It's hard to have parents dial back on their choices and options until they really become financially poor.  They are with us in our condo nearby and won't ever be uncomfortable with the three kids---but us 'dictating' his choices of spend/investment---that's just not happening

[Zaphod]

StarTrekDoc wrote:

My parents put three kids through private school and college – we siphoned a lot of their funds.   Now into their 80s, he’s not the best choices in investment, but no vices—except his constant lovefest for Put options.  

He made awful whole life annuity decisions and made a very bad real estate play on his IRA — but doing okay now that we’ve settled most of his accounts into a steady state and minimize his put option play to a single speculation account.

It’s hard to have parents dial back on their choices and options until they really become financially poor.  They are with us in our condo nearby and won’t ever be uncomfortable with the three kids—but us ‘dictating’ his choices of spend/investment—that’s just not happening

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Is he buying puts?

[StarTrekDoc]

thankfully -- selling puts. 

[Zaphod]

StarTrekDoc wrote:

thankfully — selling puts. 

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Well thats better, except the one time it wipes out months of profits.