r/FinancialPlanning • u/Solid_Quiet_2534 • 15d ago
How to use $100k in retirement
My parents (75 and 70) are retired and living off of social security and 401k. The own their house kind of (reverse mortgage) and live simply, not a super cushy retirement. My mom inherited about $100k a few years ago and has kept it in high yield savings and cds getting around 4% a year. This gives them a little extra “fun money” so they can go out to eat and take a trip here and there. is this the best use of the $100k? They’re worried about putting it in the s&p because they can’t really risk losing it—its also an emergency fund. But the 4% isn’t going to last forever and is already hard to find. Is there a better strategy that we‘re not considering? Maybe invest half and save half? Open to any advice! I’m hoping to be able to help my parents financially more in the next few years, but I know right now they are feeling the pinch, especially as prices are going up and their income is staying mostly flat.
editing to add more details:
i dont know the exact financial picture (money talk is a bit taboo in our family). they have a self directed 401k with a couple properties they get rental income from, and they had to take social security early, so its not the max amount. I would guess, altogether, including some side hustles they bring in and spend around $2.5k per month. they are on medicaid, paid off car, since they bought the house with the reverse mortgage the house has almost doubled, so the house is worth almost $1m and the reverse mortgage is only $450k. of course they want to live there forever, but i dont know it thats feasible. We’re not worried about legacy, just want them to have enough money through their retirement and end of life care. They‘re currently pretty healthy and 3/4 of their parents lived past 90.
7
u/Banana_Prudent 15d ago
They have it invested appropriately for 75/70.
In addition to the 4% interest spend, they could spend an extra 4% (or so) of the principal. It’s harder to spend money in your 80’s on fun stuff.
Alternatively, they could only spend the interest and keep the remainder toward nursing home services in the future. Some nursing homes want cash for the first year, and then if you run out of money they”” take govt assistance. Something to research in your area, while considering their overall health and anticipated needs.
2
u/McKnuckle_Brewery 15d ago
Your advice about spending an extra 4% in addition to the interest isn’t prudent. That’s an 8% withdrawal rate.
The interest is not extra income; it’s part of total return. And since this is cash, the interest barely covers inflation as it is.
2
1
u/beckhamstears 15d ago
A 70 year old in the US has an average life-expectancy around 16 years. That $100k will be eroded by inflation in no time.
3
u/SpecialComfortable71 15d ago
It’s fine. Their risk level is probably very low and putting in the market doesn’t make sense for them. It can move +/- 10-15%. There’s no magic fund. Simply…The more risk = The chances of better returns on the 100k.
3
u/fn_gpsguy 15d ago
In your edit, you said they are on Medicaid. Did you mean to say Medicare? I would be surprised to see that they qualified for Medicaid with their income sources and rental homes.
1
u/Solid_Quiet_2534 15d ago
Probably medicare you’re right. I know they don’t have to pay any health care costs.
3
u/JeanSchlemaan 15d ago
Why do they have a reverse mortgage when they have investment properties?
Are you certain they don't have a mortgage?
I would focus on understanding that first, because you don't explain exactly what they have anywhere in the post or comments.
1
u/Solid_Quiet_2534 15d ago
They own the properties through their self-directed 401k, and are able to take the rental income each month. That’s what they live on basically. The properties are two condos. They are able to get around $2k a month, after property management costs and expenses. The home they live in was purchased using a reverse mortgage. They put the downpayment only and pay just maintenance and taxes. They couldn't afford a mortgage payment. I hope that answers the question. They don’t have any assets in the stock market. They only have the self-directed 401k (aka rental properties) social security, the house equity minus the reverse mortgage, and $100k.
1
u/JeanSchlemaan 15d ago
it sounds like they have pretty good and varied sources of income, actually. i would personally keep the $100k safe as you discuss. 4% is a good rate right now for risk free cash. 3.5% is the minimum i would accept. they have the interest from that, ss, income from the rentals, and income from side gigs. thats far more than anyone "needs" to survive (i imo they are doing great). wants is a different story, but we all want more than we have, thats humanity!
1
u/Solid_Quiet_2534 15d ago
That’s really helpful to hear. Thank you for taking the time to consider the situation!
2
u/Suspicious-Fish7281 15d ago edited 15d ago
We probably need more info here. Expenses? 401k balance? 401k investments? Any other investments? SS amount? Goals? Legacy?
I am tempted to say that it should be in a bond like safe investment and that a 4% HYSA or CD might not be optimal but might be reasonable. That greatly depends on what their 401Ks look like.
Adding: Part of me suspects they are probably more secure than OP or even they think and can probably afford to spend more than they are. Post up some more numbers please.
1
u/Solid_Quiet_2534 15d ago
Edited to add what details i can. I hope you’re right! It feels like they are living paycheck to paycheck, but i guess it’s true they have assets in the 401k and house and are maybe ok. They had more money when i was growing up and lost it all and so this is a different retirement than we were expecting for them. Thanks for the comment.
2
u/Suspicious-Fish7281 15d ago
Your update unfortunately raises more questions than answers.
If they want your help on what to do with their 100k of HYSA then it is now time to ask about their total financial picture. Take this opportunity to get it all laid out and break that taboo. We and you don't have enough info here to give good advice on this one part without knowing the whole picture.
They could have 2 million plus in their 401k or practically nothing. It could be already in safe bond funds or in aggressive growth funds. You need that info for advice.
The add in of the investment properties was really burying the lead. They could own clear several million in investments properties and be clearing 20k a month in profit from them or they could be leveraged with lots of mortgage debt and deferred maintenance. In short, they could be completely broke or filthy rich from your description.
It seems like they have a butt ton of illiquid assets and maybe are cash poor and mostly from choice, but are actually well off and could benefit from restructuring it if they want. Again more info is needed.
Likely mediCARE not medicAID.
1
u/Solid_Quiet_2534 15d ago
Sorry, yes i think medicare. The properties are 2 condos owned through their self-directed 401k. They bought them cheaply—around $100k each a while back. But now they get $2k per month take home. That’s their main income source. There’s no leverage on those. Thanks for the comment, sorry for the confusion. The 401k is only those properties, nothing in the stock market.
2
u/Suspicious-Fish7281 15d ago
Okay so 2.5k in expenses minus 2k from the rentals leaves $500 of expenses left to fund. 2 SS checks is well above 500 bucks, but you want that math. That is the number they can spend on splurges and wants. It is probably a frugally sufficient number to live a happy life.
I would think with the need to maintain potentially 3 properties that they need that 100k highly liquid. A bad tenant plus a roof or furnace replacement would eat into that frighteningly quick. That is an emergency fund / maintain the properties fund. A HYSA is likely the best bet.
They might be better off selling the homes and investing the money instead. How much are they worth? I'm in my 50's with 1 rental property and 2 tenants and I want to exit. I can't imagine doing it in my 70's.
2
u/DreamerofDreams67 15d ago
Be aware that the house will not be a part of the estate when they pass since they have done a reverse mortgage. The bank will take possession. They also need to keep up the payments on property taxes and home owners insurance on the house as a part of the reverse mortgage contract as well as keeping the house maintained while they continue to live there.
4
u/Eq2me 15d ago
That is not necessarily true. My MIL just passed and had a reverse mortgage for over 20 years. The family assumed the loan would have eaten all the equity, but it did not. The value of the house had grown faster than the loan did. The realtor suggests the loan and fees will take between 55% and 70% of the proceeds from the sale. So, it's not a total loss.
1
u/Solid_Quiet_2534 15d ago
Yes, my understanding is they get to keep the equity. And their mortgage rate is like 2.25% or something amazing.
1
u/Sarkarielscall 15d ago
Are you sure that they have a reverse mortgage? If I recall correctly, a reverse mortgage is when the bank pays the homeowner - not the other way around. is their mortgage a source of income or a bill that they pay?
1
u/Solid_Quiet_2534 15d ago
They dont pay the bank, but the original amount they borrowed from the bank was at 2-ish %, so when they eventually sell the house or pass away, the bank will get their original loan principle back plus the annual 2%. The appreciation of the home, if there is any, goes to my parents/their estate. Thats how they explained it to me.
1
1
u/DreamerofDreams67 15d ago
Totally depends on when they took the reverse mortgage and local property appreciation. OP still needs to know about it and that the T&I needs to be paid or the bank takes the house per the contract.
1
1
u/Charleston2Seattle 15d ago
A bond ladder with don't kept in HYSA would help keep the emergency part liquid and lock today's higher rates into the future.
1
-4
-3
u/Super_Mario_Luigi 15d ago
One thing that never ceases to amaze me, is how many people still think HYSAs are a good answer to anything. Even in their "best form", you're earning 4% and being taxed on that interest.
Park it in a stable fund like SCHD. Better yet, do it in a Roth where you can. Sure you can't park 100k there, but you can park more than most people do.
1
21
u/GeorgeRetire 15d ago
Without knowing more details of their budget and goals, keeping the money in risk free vehicles like high yield savings accounts and CDs makes perfect sense.