Sacramento Head Start Alumni Association

Financial Makeovers

Dec 13, 2004

Financial Makeovers

Ross Levin, CFP
Accredited Investors, Inc.

Special from Bottom Line/Personal

Your elderly parents are struggling financially... you're house-rich but cash-poor... you want to retire early but aren't sure you can afford to.

Over and over again, clients ask financial planner Ross Levin for solutions to tricky money problems such as these. His advice can help you, too...

TOO MUCH HOUSE

Typical scenario: A retired 68-year-old woman came to me with a $600,000 portfolio and a house in Minneapolis worth $500,000. Her children were pressuring her to downsize to a condo in Florida. She wasn't sure if it was a smart move personally or financially.

My advice to her...

Figure out whether you can support yourself in retirement without selling your home. Many retirees count their home's value in their net worth, but they may not reap the full value if they need to sell it quickly.

The woman determined that she had an adequate income -- $60,000 per year. I advised her not to move.

Helpful: T. Rowe Price's Web site (www3.troweprice.com/ric/RIC) has a retirement income calculator, or call 800-638-5660 for information.

If you decide to stay put, upgrade your home to accommodate your needs as you age. Examples: Install better lighting in the kitchen and levers on doors instead of knobs... add antiscald valves to faucets. For more information on growing older in the comfort of your home, go to the Web site of Utah State University's Assistive Technology Program, www.aginginplace.org or call 435-797-2025.

Consider downsizing if it makes financial sense: Your home has risen steadily in value... you would profit by moving to a smaller residence or a town with a lower cost of living... you need the money to boost your retirement savings.

Helpful: To find cost-of-living comparisons, go to author Bert Sperling's Web site, www.bestplaces.net.

TAPPING SOCIAL SECURITY

Typical scenario: An unmarried salesman, age 55, was making $75,000 a year. He wanted to retire early and work part-time for $25,000 a year for about 10 years. Income from his investments would provide another $25,000. Before making a decision, he wanted to know how much he could expect in Social Security payments and when to start taking payments.

My advice to him...

Evaluate your health. The longer you expect to live, the more it pays to delay retirement. Do you have serious health issues, such as heart disease? Did your parents and grandparents live beyond normal life expectancy?

Factor in the income effect. If you take Social Security at the earliest age of 62 instead of full retirement age (age 66 for those born in 1949), you get 20% to 30% less per month. For my client, that's $365 less a month for life.

Working a few extra years full-time also will give your nest egg more time to grow. In contrast, if you were to work part-time while collecting Social Security from age 62 to full retirement age, you would lose $1 in benefits for each $2 you earn over a certain amount ($11,640 in 2004).

Upshot: My client was in good health and expected to live into his mid-80s, as his father did. He had sufficient assets and income to maintain his standard of living for 10 years. He decided to take Social Security at full retirement age, about $1,700 a month.

To find out how much you will receive, based on when you draw your benefits, fill out Form SSA-7004, Request for Social Security Statement, from the Social Security Administration. 800-772-1213, www.ssa.gov.

FINDING CASH FAST FOR COLLEGE

Typical scenario: A couple in their 50s had saved for their son's education since he was born. They failed to move into conservative investments before the bear market took hold in 2000. Even after last year's rally, their $100,000 account was down to $50,000. Their son was accepted to an Ivy League school with tuition of more than $30,000 a year. The parents did not qualify for financial aid. They did not want their son to attend a community college for the first year or two (average tuition: less than $2,000 per year) because there was no guarantee that he could later transfer to an Ivy League school. They considered borrowing from their 401(k)s.

My advice to them...

Keep the $50,000 invested to cover tuition in years three and four (see below).

To cover the first two years, don't take loans from your 401(k) plans. Instead, consider a...

Parent Loan for Undergraduate Students (PLUS). These loans require no collateral. Their interest is adjusted annually by the Department of Education. Current rate: 4.22% for the July 1, 2003, to June 30, 2004, loan period. Eligibility is based on credit history, not financial need. Payments are deferred until 60 days after the loan is dispersed. For more information: 800-413-7737, www.parentplusloan.com.

Arrange to spread tuition payments over 12 months without interest, rather than handing over a lump sum each semester. Your money can earn interest in the meantime.

Shortcut: Academic Management Services (AMS) works with more than 1,500 colleges and universities to arrange payment plans for students. Cost: About $55 per year. You can authorize a direct payment every month from your checking account. 800-635-0120, www.tuitionpay.com.

To cover years three and four, invest the $50,000 of college savings in a balanced mutual fund that includes bonds and large-cap, small-cap and international stocks. Vanguard Life Strategy funds are available in a variety of allocations, depending on your stage of life. 800-523-7731, www.vanguard.com.

ELDERLY PARENTS FACING
A CASH CRUNCH

Typical scenario: A 56-year-old businessman contacted me about his retired parents. Their income had been cut by 45% due to losses from the bear market and record-low interest rates. He didn't have a lot of spare cash, but he wanted to help them. He also worried that they were too proud to accept his help.

My advice to him...

Offer to pay for specific expenses instead of offering them a general handout. Examples: Part of their electric bill... drugs that aren't covered by insurance.

To help them save face, say, "You made a lot of sacrifices for me, and now it's my turn to do something for you."

Important: Give no more than $11,000 annually to each parent to avoid gift tax. (Direct payments of any amount to a doctor or hospital are not subject to gift tax.)

Encourage your parents to consider a reverse mortgage if they don't plan to move. A typical reverse mortgage boosts income by 13% to 19%. The home owner receives the money tax-free in either a lump sum or installments for the rest of his/her life. The loan becomes payable only after the borrower dies or sells the house. Note: While fees are high, they often are included in the loan amount, so there's little up-front cost.

For more information: The National Reverse Mortgage Lenders Association (202-939-1760, www.reversemortgage.org) or see the June 1, 2004, issue of Bottom Line/Personal.
First Printed: June 15, 2004