22 May Grandad wants to downsize, fund college for grandkids
Jason, 78, says he lives a quiet life with his dog.
He owns his own home and lives on his own, but he expects there will be a time when homeownership is too much and that he’d move to an assisted living facility.
He’s already got one picked out in Pennsylvania for when the time comes.
“Longevity is an interesting question,” Jason says. “Previous generations of men in family died in their 50s. My dad died at 48, but my mother lived to 98. My medical issues say I won’t last long!”
So thinking practically, Jason’s biggest concern is making sure his estate goes to his younger son and his two grandkids.
As part of that, he wonders if he should protect part of his IRA from market fluctuations by moving it from “stock and bond funds into something less volatile and less sensitive to downswings, such as an annuity?”
We took those questions to Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown, who reviewed Jason’s financial outlook for NJMoneyHelp.com.
MAKING DECISIONS
Part of Jason’s challenge is that he’s been hesitant to pull the trigger on big decisions.
That’s understandable because all big decisions have consequences, and the move Jason is considering will mean a huge change.
Kazanchy said Jason has found it difficult to commit because he’s owned his home for 55 years and he’s happy there.
“He has had the Pennsylvania senior living facility picked out for four years but cannot commit to the move,” Kazanchy said. “I believe that constructing the financial plan for Jason will provide him the comfort that he needs going forward to make the big decisions that he would like to make.”
Jason also has big goals of trying to help his grandchildren with their college educations, and also reducing possible estate taxes so his heirs can keep more of his assets.
“Pertaining to his three goals, he does not see one as more important than another,” Kazanchy said. “The main objective of the plan is to get a better understanding of what his available options are so that he feels comfortable and confident making a decision.”
THE SCENARIOS
Kazanchy reviewed Jason’s financials, and along with understanding his goals, came up with three possible scenarios for Jason.
As part of this, Kazanchy ran Jason’s plan through a Monte Carlo simulation, which predicts 10,000 future iterations in the market and provides a level of confidence of how likely Jason is to have assets remaining at the end of his plan, which is age 91.
Kazanchy assumed Jason’s assets were invested in a 60 percent equity and 40 percent fixed income portfolio and that he’d continue to receive Social Security benefits with 3 percent annual inflation growth.
He also assumed Jason’s oldest grandchild would start college next year, and the younger grandchild would start in four years.
On Jason’s home, Kazanchy estimated Jason would net $300,000 from his Jersey sale, thanks in part to the capital gains exclusion. He also assumed the new senior living facility would cost $45,000 upfront and $48,000 a year, with costs adjusted for inflation of 3 percent.
Jason’s first scenario assumed he does not move into the senior living facility and continues to live in his Jersey home. This would allow him to spend an extra $15,000 a year and contribute $50,000 a year for his grandkids’ college educations for the next eight years. This would provide his two grandkids a total of $200,00 each, which would ultimately be able to pay for a majority if not all of their college education expenses.
“Given his time horizon for living needs and desire to fund the college costs, I would recommend to reduce the risk exposure in his portfolio and shift to an asset allocation of 40 percent equity and 60 percent fixed income,” Kazanchy said. “This investment mix is assumed to earn a rate of return of 5.6 percent per year.”
This scenario produces an 87 percent confidence level that Jason will have assets remaining at the end of his plan.
The second scenario assumes Jason moves into the senior living facility this year after selling his Jersey home, which would reduce his living expenses by $15,000 a year.
“All of the costs to maintain his home would go away and the living facility’s annual cost of $48,000 a year would cover a significant portion of Jason’s day-to-day expenses,” Kazanchy said.
He would still be able to contribute $50,000 a year for his grandkids’ college educations for the next eight years.
For this scenario, Kazanchy also recommends Jason lower his equity allocation to 40 percent.
This scenario produces a 91 percent confidence level that Jason will have assets remaining at the end of his plan.
The final scenario produces a 99 percent confidence level that Jason won’t run out of money.
It assumes he stay in his Jersey home for five more years, moving to the senior facility in 2020. He’d also keep his expenses the same but he’d use the same college funding model, and also shift his assets to a 40 percent equity portfolio.
THE DECISION?
After reviewing the plan with Jason in more detail, Kazanchy said they determined that scenario two seemed like the most realistic scenario for Jason.
“The reason for this is because he has been wanting to move to the senior living facility for a long time but has been hesitant to commit,” he said. “Now that he has seen the numbers first hand that all three of his goals are achievable, he feels comfortable to finally make the decision to sell his home that he has lived in for 55 years and move to Pennsylvania.”
Kazanchy said Pennsylvania is a great choice for him — whether he realized it or not in the selection process.
“Unlike New Jersey, Pennsylvania does not tax retirement income which includes distributions from IRAs and Social Security,” Kazanchy said. “Now that Jason is confident with his current financial situation and knows he can achieve all three of his desired financial goals, he can have the peace of mind to make the big decisions that he has been hesitant to make for a long time.”
On Jason’s question about whether or not an annuity would be a smart investment going forward, Kazanchy isn’t so sure.
“We generally do not recommend annuities due to the high fees and the current low interest rate environment,” he said.
Kazanchy said Jason also needs to make sure his estate planning is on the mark.
“Since Jason would like his assets to pass on to his one son, we recommend to meet with an estate planning attorney to update his documents and retirement plan beneficiary designations,” he said. “The most important documents that he should update are his will, durable power of attorney, letter of intent and healthcare power of attorney.”
And if Jason makes the decision to move to Pennsylvania, he should be aware of the different estate tax laws versus those in New Jersey, Kazanchy said. An attorney with experience drafting estate plans in both states would be ideal to advise Jason.
This story was first posted in June 2015.
Money makeovers offered by NJMoneyHelp.com should be treated as general advice about personal finance and money decisions. Before you make any changes to your personal financial plan, see a professional who can consider your entire financial situation. If you’d like a free money makeover, email .Net Worth:
Assets:
- Checking: $10,600
- Savings: $14,200
- IRAs: $678,000
- Annuity: $77,000
- Mutual Funds: $463,000
- Primary Home: $300,000
- Personal Property: $20,000
Total Assets: $1,562,800
Liabilities:
- none
Total Liabilities: $0
Total Net Worth: $1,562,800
Budget:
Annual Income:
-
- Social Security: $23,800
- Required Minimum Distributions: $31,500
Monthly Expenses:
- Income Taxes: $333
- Housing: $1,290
- Utilities: $355
- Food: $300
- Personal Care: $40
- Transportation: $334
- Medical: $700
- Insurance: $116
- Entertainment: $90
- Charity: $200
- Gifts: $500
- Pet Care: $300
- Misc.: $200