Advice for retiring parents

[noppenbd]

Hi all, I need some advice for my parents, who are nearing early retirement (62 next year).

My mother has a decent pension plus a moderate 401k and my father has a decent IRA. I don't know the amounts but they are planning to stick to the 4% withdrawal rate.

They also have about $120K in an after tax account that has been in CDs for a few years (it was from an inheritance). Currently they are considering a variety of safe locations for the money (CDs, savings accts, MM funds).

Debt wise, they have two properties in FL on which they owe around 50K total. One has an interest rate of 6.2% fixed, on which they owe 20K, and the other is at 5.4% but going to reset in 2010, on which they owe 30K.

I advised them to take 50K out of the taxable account and pay off the two properties. My rationale is that they are only making around 3-4%, while paying out 6% (and going up) on the properties. Even though they get a small writeoff on the mortgage interest, that is offset by the interest made on the lump sum.

Did I give them the correct advice? If so, should they also pay off a small HELOC (balance of $18K and variable rate of 6%)?

[jIM_Ohio]

I think being debt free in retirement makes sense.

Are the properties vacation properties, rentals or something else?

If rentals, consider selling them and not liquidating cash
If vacation properties, consider renting to friends which want a place to stay (like a time share) to cover the debt payments.
If neither of above make sense, I would do some analysis with 4% withdraw rate being the primary premise, taxes being the second premise.

1) what is income needed to live on each year?
2) what is 25X this amount?
3) what is tax bracket of #1?
3a) what will taxes paid be for #1?
4) is there room to convert to a Roth in 15% tax bracket?

I would look at 1-4, then run numbers again with and without the extra properties. Maybe the payments on other properties pushes income to 25% tax bracket, and selling the properties keeps them in 15% tax bracket with more assets?

Come up with a process (like 1-4 above), then run the numbers through the process in numerous scenarios, and see which numbers make sense and which numbers do not.

The ultimate goal of Roth conversions is to not pay taxes anymore (which should lower the 4% amount needed)

4% of X paying taxes
4% of y not paying taxes-
y is less than X, which increases chances the money will last longer or 4% could be increased to 4.5%, for example.

[aida2003]

Since we are debt averse couple, I'd say pay off your debts. And we're still young. Your parents are almost retired and the majority (if not all) of so called finance experts would advise to pay debts off before retiring.

My 2 cents.

[LivingAlmostLarge]

Can they afford to keep the properties even paid off? What is the monthly liability for taxes, insurance, and say maintanence? Even paid for will it be a large chunk of monthly income?

If so I'd vote to sell potentially.

[noppenbd]

Both properties are currently rentals, and are cashflowing. The idea is to use one for a second home (3-4 months a year) and either rent out or sell the other. Being in Bradenton, FL (prices are way down) selling is not an option at this time.

My father is in home improvement business so maintenance costs are low. Taxes and insurance run around 3-4k a year.

Taxwise, they are currently and will be in the 15% tax bracket regardless of the rental income. However, they are quite close to the threshold where 85% of SS benefits are taxed. I have advised them to try to limit their IRA withdrawals to stay under this threshold. This a compelling reason to pay off the properties now to reduce the need for IRA withdrawals.

I think it makes sense to pay off the properties & HEL now. Whether they sell the 2nd property will depend on the housing & rental markets in coming years. I will also advise them to begin converting part of IRA monies to Roth now, while staying in 15% bracket. This will help them stay under 85% SS taxation threshold.

Thanks for the replies.