Get With The Plan: October 18, 2009

101809Rick and Ilsa are approaching a retirement crossroad. They live in Sussex County, but they’d like to spend half the year in Florida. They’ve recently gotten an offer they don’t want to refuse.

‘‘Our son and his wife are offering to buy a Florida home for us to live in, and we’d pay utilities and expenses, plus some form of rent that would cover property taxes and maintenance,’’ said Rick, 68. ‘‘Do we have enough to maintain our current spending levels, plus the added expenses in Florida, and not run out of money?’’

The couple has the option of “renting” the Florida home from their son, or Rick and Ilsa could borrow the money at low or no interest to purchase the home in their own names.
Rick and Ilsa, 66, whose names have been changed, have saved $404,180 in IRAs, $4,200 in a brokerage account, $15,000 in a money market and $10,000 in checking.

They own their home mortgage-free, and their only debt is a small home equity line of credit they used to buy a car.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, to help Rick and Ilsa examine their options.

‘‘There are advantages and disadvantages of both the parents and the son owning the property,’’ Lynch said. ‘‘The decision on who should own this has both financial and family issues associated with it.’’

Here’s the money side: The couple’s pensions and Social Security income cover their current expenses, and they haven’t had to raid IRAs.

If their kids buy the Florida home and Rick and Ilsa pay the expenses as a form of rent, they estimate they’d need an additional $7,200 annually. When you count taxes owed on their IRAs, which would be the source of the additional money, Lynch says they’d need to withdraw about $13,000 a year.

They have about $404,000 in IRAs, mainly in liquid investments. Using a drawdown rate of 4 to a 4.5 percent, Rick and Ilsa would receive between $16,000 and $18,000 a year. That would give them more than they need.

Lynch says their current asset allocation could give them problems if they need to live off the income from their investments. Rick and Ilsa describe themselves as conservative-to-moderate investors, which Lynch says would mean a 40 to 50 percent stock exposure. But their portfolio only has 5 percent in stocks, making them extremely conservative on paper.

Lynch recommends the three bucket approach. Bucket No. 1, worth $100,000, would be designed for drawing cash for the next four to six years. Investments would be very liquid and conservative, such as laddered CDs and money markets.

‘‘This would allow them to get through any market fluctuations without having to sell in a down market,’’ Lynch says.

Bucket No. 2, worth $150,000, would be designed for marginal growth with minimal risk, to be used four to eight years from now. Lynch says this would include 40 percent stocks and the rest in bonds, CDs, some international fixed income and other stable investments.
Bucket No. 3, worth $150,000, would be for the long haul.

‘‘We would have about 50 to 60 percent stock exposure in a diversified portfolio,’’ Lynch says. ‘‘This would allow us to get through market fluctuations and allow us to outpace inflation.’’

The next question is how to structure the home purchase.

The advantages of Rick and Ilsa owning the property include that now is a great time to buy, it would give them the stability of home ownership that many seniors prefer and they could potentially do a reverse mortgage if needed in the future.

There would be disadvantages, too. The property is an attachable asset in the event that they need long-term care, get sued or have financial trouble, and it would lock up a lot of money and potentially reduce their case flow.

Whichever way they go, their cash flow can sustain the snowbird retirement they want.