Lazy Man and Money

Helping Parents Cope with Damage to their Retirement Nest Egg

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The following is a guest post from Mr. GoTo, a baby boomer who blogs at Go To Retirement. On a personal note, I’ll be taking advantage of the “email this” button below and send it to my own mother. I hope you will join me and do the same. And don’t forget to subscribe to Mr. GoTo’s RSS feed here.

Do you have parents who are retired or who are baby boomers in the home stretch toward retirement? Like so many others, have your parents suffered significant damage to their retirement nest eggs? If so, you may not fully understand how that damage may have negatively impacted the mental and emotional outlook that your parents have toward their financial future.

Adult children can be a source of support and advice during this time. Compared to your parents, you may be optimistic because your investing horizon is much longer than that of your parents. You probably have greater emotional and mental resiliency that enables better coping skills. Your job is to carefully and lovingly apply those attributes in a way that can benefit your parents’ situation.

I am a baby boomer in the retirement home stretch. My retirement portfolio lost 21% last year and I am one of the lucky ones. Both of my parents are still alive. Fortunately, they are financially comfortable but worried nevertheless about their future.

Here are my suggestions for ways in which you can help your parents with retirement nest egg damage control.

  1. Gently encourage your parents to confront the damage. – You know they are thinking about it. You also suspect they may be stressing about it. Ignoring the problem is bad for their financial health. The stress is bad for their physical and mental health. How do you bring it up? My recommendation is to find a relatively private moment with your parents. Then choose that moment to openly talk about how the market downturn has affected you. That may prompt them to share their feelings. If not, ask them. After you have shared your story of market damage, just ask them how things have gone for them.
  2. Send your parents for a consultation with a fee-only planner. – If your parents are like most baby boomers and retirees, they are not receiving professional advice about retirement investing and planning. Now is the time to change that. You can help by making the arrangements and, if necessary, offer to pay for the consultation. Just be sure you do your due diligence on selecting a fee-only planner who is comfortable working with folks who are like your parents. To find a fee-only planner, check the and National Association of Personal Financial Advisors. Assure your parents that meeting with a financial planner is like meeting with a physician or other professional. They have a problem that needs fixing. The planner is the one who can provide a fix.
  3. Don’t let your parents turn to credit cards. – It should go without saying that adding debt to an existing financial problem is to be strongly discouraged. If you think your parents might be inclined in this direction, time for another preemptive strike. Talk about all of the credit card offers that keep arriving in your mailbox and how crazy that is considering what’s happening with our economy.
  4. Don’t let them take on excessive investment risk. – A natural reaction to suffering market losses is to move money into riskier investments. Sort of like doubling your bets in Vegas. I don’t recommend this strategy. Chasing the “next big thing” alternative investment is like rolling the dice. It’s time to get smarter about asset allocations, not take on more risk.
  5. Evaluate and adjust their retirement withdrawal rate. – If your parents are already retired and dependent on income from investments to live, encourage them to reconsider and decrease their withdrawal rate. This may require a spending reduction but that beats running out of money completely. I would encourage them to use one of the free financial planning tools and run some “what if” scenarios. A newer one that I have tried and seems to work well is Financial Fate. This is a downloadable (free) software tool. You may need to help your parents set it up and use it.
  6. Have them consider a fixed annuity. – If your parents are in a panic about having a sustainable income and still have retirement savings to provide that income, now may be a good time to have them consider other retirement income sources. A logical place to look is in immediate or deferred fixed annuities. To put this issue in front of them, send them a link to Immediate Annuities where it is very easy to run numbers on different annuity purchase and payout options. Although a fixed annuity may not be the perfect use of your parents’ money, if that guaranteed income relieves stress, it may be worth it.
  7. Suggest Downsizing – Lots of baby boomers and retirees have most of their net worth tied up into where they live. If that’s the case with your parents, it may be time to look at downsizing. When I say “downsize” I mean finding a place to live where your parents can free up equity to invest and lower their cost of living. Sometimes this requires a geographical re-location as well. For some, this is considered a desperate strategy but it shouldn’t be. Downsizing and relocating for affordability is logical and doable. A way to get this issue in front of your parents is to send them a link to Sperlings Best Places where there is an abundance of information comparing different areas of the country, including that all-important cost of living.
  8. Offer a private reverse mortgage – If your parents are really in bad shape financially and need help from family, one way to provide that help with dignity is through a private reverse mortgage. If your parents have equity in their house (or expect to grow equity over time), you can offer to buy that equity. I suggest that you agree on a total sum that you will lend your parents, to be paid out monthly or quarterly. Have a lawyer draw up a promissory note and first or second deed of trust that protects you. The note is paid off (with interest) when your parents sell the house. If you are taking risk because the loan amount exceeds the available equity, then the documents should provide that you share in any increase in value of the house, even if it exceeds principal and interest owed. This may sound too business-like but I think it will help you and your parents accept the entire relationship with less guilt and embarrassment.

I hope that your parents don’t need help following a disastrous 2008. If they do, I hope these tips will assist you in providing that help.

If you want to read about retirement planning and retirement living, come visit me at Go To Retirement or subscribe to my RSS feed.

Our Early Retirement Plan: Motivation, Numbers & Tools, and Conclusion (Part 5)

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If you are just starting this, I suggest you start at The Introduction – Part 0. Alternatively, you can jump to Our Early Retirement Plan: Where We Are Now (Part 1), Our Early Retirement Plan: My Personal Income (Part 2), Our Early Retirement Plan: My Wife’s Plan (Part 3), or Our Early Retirement Plan: Obstacles and Expenses (Part 4).

In the end, for us to succeed, we are going to have to continue to be motivated towards our goals, continue to learn about better ways to reach them, and act on the things that matter.

Part of the learning and motivation come from reading articles like the Money Magazine one that I highlighted in the beginning. Still others may come for friends and peers like My Dollar Plan’s escape from the rat race.

In part 2, I mentioned that retirement planners suggest that you can withdrawl 4% of your retirement nest egg each year and still maintain the principle. When I looked at our finances, we aren’t close to having the funds to live off of that. However, when you add my alternative income from “retirement lifesytle jobs”, an inflation-adjusted pension, two modest retirement nest eggs (and time to grow them), two investment properties, it may turn out to be a decent income. If we continue to practice our frugal lifestyle and catch a few breaks (me doing the child care while working – if possible, and getting cheap health care from the military), I think the plan is entirely possible. It’s easy for me to sit here and speculate, but what about a real world test? Glad you asked.

One of the most useful pieces of software is Bill Sholar’s FIRE Calc. I ran some rough numbers through there to see how we’d do. Looking at the publically available military charts it like my wife should have a military pension of around $50,000 in today’s dollars indexed for inflation. At the same time, my websites and businesses should be at least at $48,000 in annual income in 11 years. This is an extremely conservative estimate as I should make $40,000 this year – and I see a lot more growth on the horizon. Next we looked at what our expenses might be. Our rent, our biggest cost, is $24,000 this year. I suspect that we could easily get by on $50,000 given our frugal lifestyle. Just to build plenty of wiggle room, allow for some great vacations, or save some money for the potential children, I estimated that we’d need $80,000 a year. These numbers disregard any potential income from social security, our investment properties, or savings my wife might make until she retires. The calculator says that we could live until age 100 with around 11 million dollars. That might sound like a lot, but it is closer to $1.5 million in today’s dollars – still not chump change.

My hunch says early retirement is possible. The FireCalc tool seems to say it’s possible. It’s going to be something that I’ll have to look at every year, but at this point it looks like we are on track.