Ask Money

Financial security for parents

Chris Farrell Aug 5, 2011

Question: I’m a loyal listener, and have been itching to ask this question about my parent’s finances:

My family moved to the US around 7 years ago from Indonesia and are currently 55 years of age. My parents had enough savings from Indonesia to own a home and recently purchased a 5 unit apartment which are both paid in full.

Earlier this year however, my father was diagnosed with cancer that no longer allow him to work. Because we are moved to the US not so long ago, my parents would not have social security benefit to supplement their retirement. The property that we currently own generated around $30,000 net income (around 8% interest, not including home appreciation)–but it may not sustain completely when both my parents retires.

My question is, considering the low house price and interest rate, would re-financing our home & apt to purchase another multi-unit property be a good way to invest for their retirement? Thank you. Udayabagya, Gardena, CA

Answer: I’m sorry to hear about your father’s illness. It’s good that you’re thinking ahead about how to ensure that they have some economic security as they age.

I’m wary of the strategy of refinancing and getting another apartment complex for a very simple reason: It risks putting all of their retirement next egg in one rental property basket. One reason so many people fell into financial trouble with real estate is that they borrowed against the equity in their home to purchase another property during the boom. When the bust came these borrowers were financially fragile.

The past 5 years of economic and financial turbulence has reemphasized an important money management lesson: Diversification pays.

Don’t get me wrong. Owning rental property can be a good business and obviously they’re doing well. It appears that the trend is toward higher rents, too, with more people renting and the supply of rental housing stagnant. Nevertheless, the strategy would concentrate their risks to the rental market in your local community.

I don’t have any quick solution to providing your parents with greater economic security. There are a lot of factors to consider. I imagine the family and family resources will be a major part of their safety net in old age. I would check about Social Security, too. I don’t know their status, but Green Card and Permanent Resident Card holders pay Social Security taxes, and receive Social Security benefits when they retire. Now, they have to have worked for 10 years before retiring so it may not help in this case. And if they’re citizens they qualify. I’d check with the Social Security Administration.

Still, here are some other thoughts on how to build financial security for your parents. These aren’t definitive answers but financial avenues to think about.

Would it be better to focus on building up savings that they could then draw on as they age? For instance, they could put money into plain vanilla short-term CDs and U.S. Treasury bills. The yield on the securities at the moment is about zero, but with FDIC-insured deposits and U.S. Treasuries the principal is safe. The money will be there when they need it.

The timing isn’t right for the moment, but at some point it might make sense to put some money into an immediate annuity. It would provide an income they can’t outlive. The reason I would be wary of immediate annuities is that interest rates are so low. However, you could familiarize yourself with the product and see if it will help meet their needs.

You’ll only want to do business with a blue-chip high-quality company. Your parents would invest a sum of money with the insurance company and get a predictable monthly income (or quarterly or annual depending on the chosen payout option) on the investment for the rest of their lives.

I favor inflation-protected immediate annuities, since inflation eats away at the value of money. However, the monthly check from the annuity is lower if there is inflation protection. You should also take into account that immediate annuities are inflexible: The money is locked in. That’s why you don’t want to annuitize everything. The unexpected always happens and, therefore, you want some of your money to remain flexible.

These are some of my suggestions. What other strategies do others have that could go on the “to consider” list? Thoughts anyone?

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