Dear Rick:
My wife and I turned 66 earlier this year and have both just retired. I have a pension and my wife does not. Between my pension and Social Security, we bring in about $8,000 a month. We have no debt as our house is paid off and we plan to do a fair amount of traveling for as long as our health allows. We estimate that with our travel it will cost us about $11,000 a month to live. If we add up our 401(k)s, IRAs, and our personal accounts, we have about $1 million total. We have two children who struggle financially and we would like to help them. We are thinking about giving them enough to pay off their mortgages. They each have approximately $150,000 in mortgages. My question to you is, if we make this gift, do you think we still have enough money to protect ourselves?

Thank you.

Brian

Dear Brian:
I would love to tell you that you have the resources to pay off your children’s home, however, I can’t. My reasoning is that in order to accomplish your goals of maintaining your lifestyle and traveling, you are going to need approximately $36,000 a year from your portfolio. If you make the gifts, your portfolio would be reduced to $700,000, and I think a $36,000 a year draw is too high, and as a result, you could find later in life that you don’t have the resources to protect yourself.

In reviewing your situation, my philosophy is that you have to plan that you and/or your wife will be around until your mid-90s. In addition, you have to factor in that during your lifetime your cost of living is going to increase. Unfortunately, your pension is not going to increase, and even though your Social Security will get a cost-of-living adjustment, that cost-of-living adjustment will be substantially less than the actual increase in your cost of living. Therefore, the money that you are gifting today could severely impact the quality of your life.

For someone who is retiring at 66 and will begin needing distributions from their portfolio, the maximum distribution should be no more than four percent of the portfolio. In the case at hand, with a $1 million portfolio, that means that you can safely withdraw $40,000 per year. On the other hand, if your portfolio was only $700,000 the maximum withdrawal would be about $28,000 which would not cover your current needs.

An issue that keeps coming up more and more for seniors is determining how much of their resources should be used to support their children and grandchildren. My philosophy is that before you help others financially you must be sure you have plenty of resources to protect yourself. One million dollars seems like a lot of money, and it is; however, it is not that much if you need to take out at least $3,000 a month from the portfolio. After all, if it’s $3,000 a month today, five years from now it could easily be $4,000 a month. Therefore, if you give money away too soon, you may find that your lifestyle is being hindered.

For parents and grandparents who are thinking of making large financial gifts, I always say to proceed with caution. You need to make sure that you have the resources to protect yourself whether you live to 95 or 105. If there’s one time in your life you need to be selfish, this is the time. After all, you have to think about the reality of what happens if you run out of money. If that happens, you may find your only option is to severely cut back on your lifestyle, and I’m not sure if that’s something most people would want to do.

Good luck!

Rick is a fee-only financial advisor.  If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.