Retirement Advice - my parents

**jIM_Ohio** · 08-31-2010, 07:20 AM

Originally posted by Bob B. View Post

My parents have asked me to help advise them on their retirement planning (I suppose because I went to college - but I was a science major). They have set a tentative target date as June 2011. My mom will be 62 and my dad will be 64. They earn between $55 - 60 K, together, per year.

My mom's pension will pay $7,200 per year. Between my dad's 401(K) and their IRAs, they have about 120K saved. I'm guessing SS payments of about 24K per year. They also own 200 acres of farm land that they rent out. After property taxes and some land improvement expenses, they net about $8k per year on the land rental.

I've figured that on their 401(k) and IRAs that if they withdraw $7,200 per year, and assume 5% growth, those funds will last 32 years before they are exhausted (bringing my mom to age 94, and dad to age 96).

So ... that comes to a yearly total retirement income of $46,400. After state and federal taxes the net (I think) would be closer to $45,200, or about $3,700 per month. That's about 80% of their current income - probably OK to retire on.

Additional detail - Their house is paid for, no credit card debt, car will be paid for by June 2011. They will both keep health insurance. I've asked them to develop a monthly budget, but it's not done yet.

I will ultimately advise them to see a professional. I just want to get them to a point to be thinking about the right things before they see the professional.

Is my thinking right? Any advice?

All thinking is sound thus far...

Focus on expenses first- its the single variable they have the most control over.

Here is the math I would do

take yearly expenses come up with a number

I will label that Exp

Then subtract the annual pension benefot

I will call that Pen

Then subtract the annual social security benefit (if both collect SS, this is a variable because what you might want to do is have one parent claim it NOW and a second delay it for as long as possible, and if possible, delay the spouse which would have the HIGHEST benefit (I believe I read that somewhere, but check me on that). Meaning if both parents can claim SS, taking it early penalizes them, so have the lowest benefit take the penalty and get some income now, while the other spouse with bigger benefit delays SS until its the max benefit at age 70.

The annual SS benefit is labeled SS

The farm income should also be subtracted, I will label this FmInc

So the formula you need is Exp-(Pen+SS+FmInc) this is Retirement Need I will label ReNeed

So the value of all investments needs to cover ReNeed.

Take ReNeed and multiply by 25. If retirement accounts have this, success rates will be high. The 120k saved will be worth about 4% per year (so $4800 per year) and this stream of income would last for 30+ years.

Keep in mind all this was driven by expenses/budget originally, almost all other variables are fixed. If they see a professional, be weary of annuities and check for survivorship clauses and costs (make sure both parents can live off same income stream)

Other alternatives-

$8k per year is not much income from 200 acres. They could probably sell a portion of the land- say 100 acres, and get about $100,000- $500,000 for the land (right??) and then take 4% of that amount and compare it to the 8k income, and the land needs a higher return on the investment than just 8k.

4% of 500k is 20k- if they can get cash for the land, that is a good alternative to consider.

More than likely your parents have a high net worth based on a paid for house and large land mass. That net worth is not translating into high income though, so you might need to gently suggest this. I know it might not be easy.

**Bob B.** · 08-31-2010, 07:56 AM

Thanks for the advice jIM_Ohio. Very good advice!

As far as the recommendation to sell 100 acres of farm land ... we're entering the arena of conflict of interest. That farm land will (hopefully) be my sister's and my inheritance some day. It's been in the family for 125+ years. But, yes, if I were an impartial adviser, I would make the same recommendation.

Yes, they are renting it for less than they could be. I think there are three or four more years left on the existing rental agreement. They could probably get 30% more from rental income, as long as farm commodity levels remain strong.

**jIM_Ohio** · 08-31-2010, 08:18 AM

Originally posted by Bob B. View Post

Thanks for the advice jIM_Ohio. Very good advice!

As far as the recommendation to sell 100 acres of farm land ... we're entering the arena of conflict of interest. That farm land will (hopefully) be my sister's and my inheritance some day. It's been in the family for 125+ years. But, yes, if I were an impartial adviser, I would make the same recommendation.

Yes, they are renting it for less than they could be. I think there are three or four more years left on the existing rental agreement. They could probably get 30% more from rental income, as long as farm commodity levels remain strong.

It depends how the income pans out and what the retirement need variable becomes. 120k is not much to fund that- in general most retirement advice will be to spend between 3-7% of that total- 7% is $8400, so the 401k will not generate much income in the best case scenario. 4% is best used for high success rates with investments, where as 7% is probably an annuity of some sort.

If the 200 acres was split up so 50k went to you and 50k went to sister and 100 acres was sold to generate assets for parents to live off, that might be a decent compromise (if you are a farmer, then I guess 200 acres is better than 50, but if you only wanted the land to have it, there is more to life than owning 100 acres (is there anything you can do with 100 acres you cannot do with 50 acres?).

**edit to add**
If parents can sell 100 acres for $500k (for example), that 500k will **PROBABLY** have something left in 30-50 years... Meaning when they move on, you could have either

100 acres of land
or 50 acres of land and a portion of parents estate, about 100k-200k each (conservative estimate- depends on market performanace) with the added benefit your parents had income to live on while retired.

This would also get your sister involved, and that might be a good idea before seeing an advisor.

Retirement Advice - my parents