Monday, September 15, 2008

Details on Dad's Finances

Quick background for anyone who hasn't been following this series:

Yikes, family health crisis!
More info on the crisis and what I needed to do
Organizing my father's finances
Attempts at estate planning
How Mom felt about all this

Now for the details on my father's actual financial situation:

I had no idea what to expect when I started diving into my dad's finances. I figured he'd always made a good income working for a large company, but I knew his salary was never huge. Given how he'd always talked about money, I knew he made efforts to save for the future. I also knew that he had inherited a share of the proceeds of selling my grandmother's house after she died a few years ago, which I figured had to be close to $100,000.

But on the other hand, I knew my mother had blown a lot of cash in recent years. And I knew that he was always complaining about how much money she spent in general. He was always worried about surviving after retirement-- he had put off retiring for as long as he could, and was still working part time to try to bring in extra cash. I also knew that he'd had to take out a second mortgage on the house when my sister and I were going to college, and had no idea whether that was still being paid.

So which was it? Was my dad well-off, or was he broke? It was a total mystery. But here's what I figured out:

Home Equity: my father had paid off the primary and secondary mortgages on his house, and owns it free and clear. He estimated its value at about $400,000-- it's in a desirable community with very good public schools, but the house itself could use some renovations, and is very small, though it has a decent-sized yard. FYI, my father, at least, has no interest in living anywhere other than in this house, so the only way to get any money out of the home would be a HELOC or a reverse mortgage. If he died, my mother might consider moving to a condo but she might also want to stay in the house for as long as possible.

401k: he has about $180,000 in a 401k account. This doesn't seem like much, but keep in mind that he also has a defined-benefit pension plan.

Bank #1: a credit union associated with his employer, where he has a checking account, about $30,000 in a CD, and about $50,000 in a money market fund earning less than 2% interest. (We'll be doing something about that!)

Bank #2: another local credit union, where he has about $80,000 in various CDs.

That's it. He has no life insurance policy, so there would be no additional cash upon his death. But his total net worth is about $740,000.

As for his income, his pension nets out at about $2,750 a month. That's after some taxes and health insurance premiums are deducted. He also gets a Social Security payment of about $1,250 a month. Then his various accounts are earning some interest, say maybe $2,000 or so a year. So his total yearly income is about $50,000 net-- not bad at all. Unfortunately, if he died my mother would only get half of his pension, and I'm not sure how much Social Security she'd get.

So how would their income and assets cover their spending? Here's a budget I drew up:


Mom and Dad Mom only
Income:

Pension (net) $ 33,024 $ 16,512
SocSec (net) $ 15,024 $ 7,512
Interest $ 2,000 $ 2,000
Income not counting withdrawal from savings $ 50,048 $ 26,024



Withdrawal from 401K $ 10,000 $ 10,000
Withdrawal from Other Savings* $ (1,438) $ 8,686



Expenses:

Fixed:

Car Lease 05 Subaru** $ 3,800 $ -
Car Lease 08 Subaru $ 3,300 $ 3,300
Car Insurance $ 1,400 $ 700
Property Taxes $ 4,000 $ 4,000
Income Taxes $ 3,000 $ 3,000
Heating Oil $ 5,000 $ 5,000
Water & Sewer $ 800 $ 800
Electricity $ 1,000 $ 1,000
Home Phone $ 800 $ 800
Cell Phone Mom $ 1,050 $ 1,050
Cell Phone Dad (prepaid plan)
$ 100 $ -
Internet $ 360 $ 360
Cable TV $ 900 $ 900
Landscaping $ 5,000 $ 5,000
Property Insurance $ 1,100 $ 1,100
Health Insurance*** $ - $ -
Variable:

Food: eating out $ 600 $ 600
Food: groceries $ 7,500 $ 5,000
Food: wine $ 1,200 $ 200
Gas $ 2,000 $ 1,200
Medical: Co-pays for visits $ 500 $ 250
Medical: Medicines $ 500 $ 250
Dental $ 500 $ 250
Clothing $ 1,500 $ 1,000
Entertainment $ 500 $ 300
Books $ 500 $ 100
Music $ 1,000 $ 200
Gifts $ 3,000 $ 2,000
Hair/grooming $ 1,500 $ 1,000
Home Repairs $ 2,000 $ 2,000
Household supplies $ 300 $ 300
Laundry/drycleaning $ 400 $ 150
Magazines, newspapers $ 1,000 $ 400
Travel $ 1,500 $ 1,500
Miscellaneous other $ 1,000 $ 1,000



TOTAL EXPENSES $ 58,610 $ 44,710


Notes:
In general, all the stuff in italics is just my estimation, not really based on detailed analysis of my parents' actual spending
*The "withdraw from savings" field was a calculation, to see how much would be needed after spending all the income. With Dad's full pension and these budgeted expenses, the number is negative because he actually wouldn't need to withdraw any more from savings beyond the $10,000 from the 401k. The $10,000 is just my estimate of what he'd have to take as a required minimum distribution each year anyway.
**While my mother has been away, my sister and her husband have been using her car. If one of my parents was to die, I assume we'd just give up that car, or my sister would start paying for it herself.
***Right now, my mother's insurance is deducted from the gross amount of my father's pension. She'll be eligible for Medicare next year, so the costs would probably change anyway, if my dad's retiree coverage can get her some kind of supplemental insurance.

Based on this budget, if both my parents are living, they should be able to survive just fine to a good old age. There are bound to be additional large expenses like major dental work, renovations to the house, etc., but some of the variable expenses will decrease as they get older too. (And really, a 74 year old man with diabetes shouldn't be drinking $100 worth of wine every month!!)
But if my father was to die, my mother would have to be quite cautious about her expenses to make sure her money would last. On her lower income, she'd have to draw more from savings, and on this budget, the savings could be depleted in 20 years or so. My mother is only 64, and though her family doesn't have as much longevity as my father's, hopefully she will live past 84. Again, her spending habits may change over time. And none of what I've calculated here even considers the possibility of paying for a nursing home or assisted living facility. But I guess that is where the house comes in-- that $400,000 equity could be tapped to cover further expenses.

At first, I was worried that my parents didn't have enough money, but I feel better about it now. If my mother is let loose on the bank accounts, her spending habits could lead to problems, but otherwise, my parents have a comfortable but not extravagant lifestyle. They aren't into traveling or any expensive hobbies, really, and they should have sufficient assets to live simply for many years to come. But again, many of these calculations are based on my own guesswork-- I'll be doing more research into their actual spending history to make sure this budget is realistic, and I'll talk to both my parents about whatever I find out.

10 comments:

Anonymous said...

Although I admire your financial focus, your candid discussion and calculations of "dad being dead" is a hair disturbing. Nevertheless, both seem to be well prepared for retirement considering the number of ill prepared citizens in the U.S. (only to get worse as the company pensions and social security problem gets more intense -- prepare for taxing those who have properly prepared for retirement as I can feel it happening)

On the note of 'cold' discussions of the eventual, my brother calculates the statistics on the number of times we visit parents each year and the expected lifespan ... he has the number of visit down to a frightening 20 or so. Look at it either way is a bit disturbing, if you ask me. (figure it, but don't say it)

Optioned Unarmed said...

Looks like your parents are in a position to be fine throughout their retirement, as long as the assets are used responsibly.

I notice that the expenses related to owning/maintaining the house are quite high... How about making a third (post-dad) column, in which the house is liquidated (and earning interest) and mom rents a one or two-bedroom apartment?

Mariena said...
This comment has been removed by the author.
Mariena said...

Your parents are so very lucky to have you and your ability to calculate carefully all those numbers and to lay it out so well. I thinks that if schools provided a really good financial ed class students could be better prepared for the future, theirs and their family's.

Anonymous said...

Thanks for posting this. This is one of the financial subjects I worry about the most - and which the people I know talk about the least. I really appreciate the chance to see how it all works through for another family.

Betsyh11 said...

Thank you so much for these posts about your folks. It really gets into the details of the kinds of considerations we all need to have for our families, but also for ourselves. These personal, down-and-dirty posts are an enormous help to me. Thank you.

modena 604 in nyc said...

wow...you could have a second job as an financial advisor. hehee

thanks for your reply on my last comment.

i figured that your friends and family didn't know you were madameX but i thought that would ask for confirmation. but i have another question, does any of your family or friends ever mention about reading madameX's blogs? not knowing it's your blog. hehehe

Madame X said...

@ modena, no, I've never met anyone who mentioned reading this blog without knowing I was the author. The weirdest thing that ever happened was getting an email from someone who used to work with me, asking me to review a book!

stephanie said...

Why on earth are both of your parents leasing new (or nearly new) vehicles?

sarah said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Sarah

http://www.thetreadmillguide.com