How much should I have in my EF?

[disneysteve]

Originally Posted by ScrimpAndSave

So I should trash the whole idea? Without his $50,000 - we could not afford the house at the time that he wants us to buy it.

I have two concerns:

1. Any money he gives should be distributed equally between the kids. You shouldn't get $18,000 more than everyone else. That's asking for trouble.

2. He needs to be sure he can truly afford to give away all that money. If his portfolio is only $400,000 as you say, how can he possibly afford to give away $210,000 ($192,000 plus $18,000)? What is he living on now? Does he depend on his portfolio for income or is he depending on Social Security and maybe a pension? Leaving only $200,000 (or less) in his portfolio would only allow annual withdrawals for $8,000-$10,000 to ensure not running out of money during his lifetime.

[gamecock43]

$8,000-$10,000 a month Disney?

[disneysteve]

Originally Posted by disneysteve

Leaving only $200,000 (or less) in his portfolio would only allow annual withdrawals for $8,000-$10,000 to ensure not running out of money during his lifetime.

Originally Posted by gamecock43

$8,000-$10,000 a month Disney?

A 4% or 5% withdrawal rate, which is what is generally recommended, would allow him to draw $8,000-$10,000 per YEAR from a portfolio of $200,000. He may be able to draw a little more since he is already 74, but you still aren't looking at very much income from investments. If he has a great pension, though, he may not need much from his investments.

[ScrimpAndSave]

When I say portfolio, I mean funds not including the amount the home is worth.

He has about $400,000 that is basically liquid it conservative stocks (he uses T. Rowe Price). I am not sure how much he pulls out and I am not sure what he gets for Social Security. He did have a pension - but I think it was from an old job and he ended up taking the money as a lump sum because he wasn't happy about how it was managed...and he says that it was apparently a very good decision. So, basically, he would be giving the $48,000 from the worth of the home. The house would go for around $280,000 and he would give each of us (4 couples) $48,000. Rather than have him "gift" the $18,000...he said he would just discount the house from $300,000 - around $280,000.

SO...he would have around $400,000 in his portfolio (I really need to check and see how accurate that is) plus about $88,000 from the sale of the home (After giving each couple $48,000).

My sister in Atlanta would like to go in with him on the home in Hilton Head Island...and she does not want her portion of the $50,000 upfront (investing it in the home instead)...but that is a whole other subject area and I have no idea what is happening with that.

Does that make it even more confusing? Haha! Either way - he feels like his home is up for grabs for any of us to buy...and that if any of my siblings wanted to buy the home with the $20,000 discount, we could...and I am the one that has come up to bat.

I guess it really depends on family situations too. I know that money can change families and make things ugly though - so I am not going to be ignorant about that.

I will have to have a serious talk with him about his finances as well. I also want to talk to my millionaire sister in Georgia...I know that she would love for him to move in with her eventually (she has a 5,000 + square foot home)...my brother in law is all for that, too.

Thank you for your suggestions. I will speak with him about the reality of it all.

[DebbieL]

This way:

Your father gives away $192,000 to his kids/spouses and gets $280,000 back if you buy the house (don't forget you don't really know where your fiance will be working, etc.). $400K - $192K = $208K + $280K = $488K

If your father just sells the house:

Let's be conservative and assume he can only get $260K for it after paying realtor fees, etc.

His current portfolio = $400K + $260K = $660K

I know which one I would recommend to him. He could live another 25 years and that money has to last him.

[jIM_Ohio]

Originally Posted by DebbieL

This way:

Your father gives away $192,000 to his kids/spouses and gets $280,000 back if you buy the house (don't forget you don't really know where your fiance will be working, etc.). $400K - $192K = $208K + $280K = $488K

If your father just sells the house:

Let's be conservative and assume he can only get $260K for it after paying realtor fees, etc.

His current portfolio = $400K + $260K = $660K

I know which one I would recommend to him. He could live another 25 years and that money has to last him.

I will second that if your father wants to gift money to the kids, there are other ways other than discounting the house value.

I might suggest instead of "giving away" a portion of the home sale proceeds he look at a permanent insurance policy or similar and he could tuck the gifts inside that insurance policy which is paid upon his death.

If he lives a long time he could access the cash value of the policy and withdraw the money.

[ScrimpAndSave]

I guess I should buy a different house..and only put 5%-10% down...because that is all I will be able to afford.

[disneysteve]

Originally Posted by ScrimpAndSave

I guess I should buy a different house..and only put 5%-10% down...because that is all I will be able to afford.

I know you may feel like we're beating you up on this, but I don't think that is anyone's point. Certainly, the plan you and your father have might work out perfectly well. Some of us were just trying to point out possible faults or loopholes that could possibly pose a problem down the line.

If everyone is in agreement and satisfied with the terms of the deal and your father feels he has sufficient funds to live on, then it isn't up to any of us to say not to do it and I wouldn't trash the plan solely because of what a bunch of strangers on an internet chat board said. Go ahead and meet with the estate attorney and see what he/she says and recommends.

[DebbieL]

You seem to be very all or nothing in your posts. Either you have to do plan A (buy your dad's house) or else you will ONLY be able to put 5% or 10% on another house. What happened to your original plan to save a whole bunch of money in the next couple years? It seems to me you had plans on saving enough that you could put more than 5% on another house? You are all over the board. Last month you were thinking of buying a house right now and were looking at several houses with a realtor.

I think you need to get out of this all or nothing mindset (it must affect your life in other ways too).

I personally wouldn't buy my parents' house, but if that's what you want to do then nothing anyone here says should make any difference anyways. I'm not sure your dad is doing what's in his best interest by gifting so much money when he really doesn't have a huge amount, but that's none of my business either.

[ActYourWage]

Originally Posted by DebbieL

You seem to be very all or nothing in your posts. Either you have to do plan A (buy your dad's house) or else you will ONLY be able to put 5% or 10% on another house. What happened to your original plan to save a whole bunch of money in the next couple years? It seems to me you had plans on saving enough that you could put more than 5% on another house? You are all over the board. Last month you were thinking of buying a house right now and were looking at several houses with a realtor.

I think you need to get out of this all or nothing mindset (it must affect your life in other ways too).

I personally wouldn't buy my parents' house, but if that's what you want to do then nothing anyone here says should make any difference anyways. I'm not sure your dad is doing what's in his best interest by gifting so much money when he really doesn't have a huge amount, but that's none of my business either.

That's why personal finances are "80% behavior (I'll add emotional) and only 20% head knowleged".

[gamecock43]

I would love to buy the house I grew up in. I used to try and devise a way to become a millionaire just so I could buy it! If I knew then how much I would heart that house now, I would not have advised my mom to sell it. But sadly she sold it just before the boom. The dang thing is worth over $750,000 now. No way I am ever getting that house.
Anyways, this is about Scrimp, I just got to thinking about my old house reading the posts.

[noppenbd]

I'll throw my 2 cents in. Here's what I would do if it were me. Suggest your father discount the house by $24000. You could ignore the realtor fee issue (which could be a bit messy in an audit) and just have him give you and your husband $12K each. Assuming you can save around $40K by the time of the sale that gives you a $236K mortgage which is completely reasonable for $110K a year income. Your PITI would be around $1500, which is only 16% of gross, well within guidelines.

Then to make it equal your dad only has to give out $24K to the remaining 3 couples. This comes out to $72K, which dents your father's nest egg a lot less. You could even argue that since he is avoiding realtor's fees he is not out the whole $24K that he is giving you, but I'm not sure I would go down that route.

Then down the road if he really doesn't need the money, I'm sure he will find a way to get it distributed (either before or after he passes). Then at that time you can pay down the principal if it makes sense.

EDIT: I reread and realized your income won't be $110K until May 2009. But I think you could either wait until then (and pay your dad some rent) or try and qualify just on your income. With $58K income PITI comes out to 31% which is borderline, so you may have to check with some mortgage lenders to see if it will work.

[disneysteve]

Originally Posted by ScrimpAndSave

I guess I should buy a different house..and only put 5%-10% down...because that is all I will be able to afford.

Another question... Won't your husband be working by then? Won't you actually have a much higher income and, hopefully, greater savings when you count in his contribution?

[ScrimpAndSave]

I would hope so. We weren't planning on buying until January 2010. But by that point, we will have about $40,000 saved...and I wouldn't want to put the entire amount down on a home...we would only be able to afford 5%-10% at that point.

I guess we would have to rent for a year or two after that - which I would hate to do since renting is very expensive here and I wouldn't be able to save very much.

The initial plan WAS to stay, pay rent to my dad, and save up a LOT of money over a few years ($100,000 by spring 2011)....but my dad is talking about getting rid of this house sooner than I thought...and there is no way I can save the same amount of money while paying the crazy rent around here.

[zetta]

If the extra $18,000 (over what your siblings receive) were the only sticking point, one option would be for your father to loan you the money and for you to pay it back at a fair interest rate.

I agree with the other posters who have said your dad may be giving away too much money given his age. Perhaps it would be worth visiting a certifed financial planner to get a professional opinion on the plan.

[MiikeB]

I think you should just go through with it.

Yes there are many ways this could turn out ugly, but only you know how your family is and how they would react to it.

If everyone feels this is fine and you don't think it will end badly just do it, no sense and beating yourself up over it.

[cptacek]

A few things. Right now your father doesn't have a mortgage payment (I think) AND he has you paying him $400 a month rent. Does the future plans include this drop in income for you?

Also, will you be married by the time the gifts are distributed? If not, I think it is really unfair to your other siblings for your dad to give money away to a "legal stranger". And, what if you break up before then? I know, it won't happen to you. Unless it does. Then what?

[gamecock43]

"...unless it does" LOL...that just made me giggle.
I am sure they will create a contract regarding what happens in the event of a breakup. Because in that case...OP cant afford to buy the house anyway. And this might be a good reason to draw up a pre-nup of some sort. You would hate to see the family house go to him or be sold off due to a divorce.

[ScrimpAndSave]

Originally Posted by cptacek

A few things. Right now your father doesn't have a mortgage payment (I think) AND he has you paying him $400 a month rent. Does the future plans include this drop in income for you?

Also, will you be married by the time the gifts are distributed? If not, I think it is really unfair to your other siblings for your dad to give money away to a "legal stranger". And, what if you break up before then? I know, it won't happen to you. Unless it does. Then what?

You are correct. He paid off his mortgage payment back in the mid 1980's. I pay him $400 a month rent (and buy a lot of the food).

By the time the gifts are given, YES I will be married. I wouldn't do that any other way. We will be married Sept. 2009 and then he was thinking of doing the gift thing at the end of December 2009 and January 2010.