Dear Liz: I try to watch out for my neighbors, a married couple in their early 90s. Two of their three sons, who are both in their 60s, want them to get a reverse mortgage. The couple's house is paid off as well as their cars. They pay all their monthly bills with Social Security and his pension. They have a living trust as well. Neither I nor the couple see any reason or upside but the sons are pressuring. Any input?
Answer: A reverse mortgage is typically a last-resort option for elderly people who are strapped for cash and who have few options for generating income other than tapping their home equity. The couple you're describing does not seem to fit that profile.
The sons, however, may fit the profile of greedy relatives who can't wait for their inheritances and who are trying to get their mitts on some money early (possibly squeezing out the third brother).
"Mommy, what is Thanksgiving?"
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My 4-year-old was coloring his Thanksgiving-themed homework -- which involved drawing his favorite foods on a plate.
"It's a day when we get together with friends and family and celebrate all we are thankful for," I said, trying to make something up on the fly.
"Thankful?" he asked. "What is 'thankful'?"
"The things that we are happy about -- or glad to share," I said.
"Like my trucks?" he asked. "I let Emmett play with my ambulance, remember?"
"Sort of like that," I said.
"And my Binkers?" he said, holding up a rag that once resembled a blanket. (It's now nicknamed "Stinkers".)
"Yes, it's important to be grateful for everything that makes you feel good," I said, watching him place "Stinkers" under his nose and inhale like he was taking a drag of a cigarette.
"And Mommy and Daddy," he mumbled through his blanket.
"Exactly," I said.
"But how is this different from every day?" he asked.
My little man knows about grateful. Just the other day we were sitting in hideous traffic and he said, "I just love sitting in the car with you, Mommy." So it only made sense that he would question the need to have a big dinner based on the theme of what he already does on a regular basis.
"Sometimes people need to be reminded," I said.
He grabbed his marker to finish his homework.
"Can we have noodles?" he asked, drawing his dinner of choice on the paper.
"We're going to have turkey, honey," I said.
"Interesting," he said.
"Is that the rule?" he asked.
"Sort of," I said. "That's what Daddy will be making."
He took his marker and drew several dots on top of his noodles to represent the parmesan cheese.
"OK," he sighed, still dotting the page. "But I won't be as Thanksgiving as I would if we were eating noodles. Just so you know."
"Gotcha," I said.
May your Thanksgiving be filled with memories and gratitude. (With or without the noodles.)
That assessment may be too harsh, but you might encourage the couple to talk to the attorney who drew up their living trust about this. If that attorney isn't experienced in helping the elderly protect themselves, a field known as elder law, you could help them find someone who is by getting referrals from the National Academy of Elder Law Attorneys, http://www.naela.org. If the two sons have any role in handling their parents' money should the parents become incapacitated, it might be prudent to replace them or at least name another trusted party to serve with them.
Your neighbors also should consider letting the third son know what his brothers have been trying to do. In some families, the best defense against greed is an ethical relative who can keep his eye on the rest.
401(k) loan carries high cost
Dear Liz: I bought my condo in 2009. I took out a loan on my 401(k) account to use for the down payment. I left my job in early 2012, and at the time didn't have the money to pay back the loan, so the balance was treated as a distribution. I now owe the IRS $10,000 and don't have the money to pay them, nor can I afford monthly payments beyond about $50. I can't borrow any money from a family member or friend. My tax guy suggested (another) 401(k) loan, but I'm really reluctant to go deeper into debt. Any suggestions?
Answer: Thank you for providing a vivid example of why people should think twice before dipping into retirement funds to buy a house. Not only are you facing a steep tax bill, but the money you withdrew can't be restored to your account, so you're losing all the tax-deferred gains that cash could have earned over the coming decades. You can figure that every $10,000 withdrawn costs you at least $100,000 in lost future retirement funds, assuming an 8% average annual return on investment over 30 years.
So it would be good, if at all possible, to leave your retirement funds alone from now on. That means you need to come up with the cash to pay what you owe, and $50 a month doesn't cut it. To use an IRS payment plan, you'll need to come up with about $140 a month to pay your bill off within the required 72 months.
Fortunately, there are plenty of ways to trim your spending so you can free up more money to pay this bill. These ways include, but aren't limited to: ending your pay TV subscription, preparing meals at home instead of eating out, trading your smartphone for a dumber one or at least switching to a prepaid plan, selling or storing your car and using public transportation, or selling your condo and moving to a cheaper place.
When people have virtually no discretionary income left after paying bills, and they're employed, the culprits are often their housing or transportation costs, or both. Reducing these can be painful but may be necessary if you want to get on more solid financial footing.
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