Son's Illness need to sell or convert? Use IRA$$?

Question

We were hit with a bit of bad luck this year. Our grown son became ill and we are the caretakers, looks like it maybe long term. I'm 64, plan was to retire in 6 yrs. Finances are screwed due to medical et al. Debt $33k, student loans $20k (don't ask) mortgage $312k  $250k in IRA. Recent CMA on house $385K. Luckily I'm still employed, but spouse fulltime caretaker. I'm an estimator by trade, contractor on the side & property mananger for friends, wanted to invest in rental property.

If I sell it will pay off all debts, I'd have nothing left after commission but my IRA money. I realize I need more than what's in IRA to manage sick son & any kind of lifestyle.

Do I hold onto house, convert portion handicapped accessible apartment? (I believe once son's maxed out insurance he'd be eligible for medicaid & section 8 to pay rent on unit) Then use IRA to purchase income producing property, to further help?

Thanks

Chris R. · Answer

Cal & Joel,

Great advice! Thanks.

The plan to convert basement, where it would yield large 1 bdrm apt (or 2 small) the rent would cover most of mortgage payment. It would help me pay down debt plus assist my son & with added equity in the house I could leverage for purchase of another property.

Cal C. · Answer

The only thing I would do with the IRA money is to provide seed money for the first flip and as little of that as possible.  An investment loan would be a lot better.

That $250K, hopefully $350K by the time you retire, is not going to provide you with a comfortable retirement particularly with a mortgage to be paid off.  Assuming you get $3,000 a month in social security you'll need at least another $41K to replace your current income.  As @Joel Owens alluded to you'll need some very high returns so as not to eat into your nest egg.  Assume you have $350K in your IRA upon retirement- to replace the $41K ($77K less $36K iin ss) and leave your nest egg intact you would have to have earnings of just under 12% before taxes.  That can be done, but it would involve a lot of risk.

You'll notice that having six paid off rental properties and renting at $1,000 a month, will just about replace the part of your salary not provided by social security.

Another way that financial advisers look at things is to assume you can safely take out 4% of your retirement nest egg (they exclude rental income) yearly and you probably won't run out of money before you die.  4% of $350K is 14K per year.  Which would mean you'll be $22K short of current earnings.  Normally, this would be okay, but you'll have a mortgage on  your property and your son's health issues...  Also the 4% strategy is for you and your wife only.  It would be lower (2%?)  if you are planning for your son to live off that nest egg after you and your wife are gone.

One other factor you also need to think about is long term health care insurance for yourself especially.  As you probably know it takes a lot out of a primary caretaker for one person and would be even more difficult if it were two.

Joel Owens · Answer

Since you would be using IRA money you have to be careful about how you invest it so you do not get penalized.

For your son you would need to set up a family trust or something similar. A friend of ours has an autistic son about 12 years old now. They have a special insurance policy and trust set up to where anything ever happens to them their son is cared for with no worries. They are very high income earners so can afford to do this which makes it easier.

Even though your wife is a caretaker now that might change in future years. At 64 now you might not feel it as much but I can tell you my mom going from 60's into her 70's now there is a huge difference in your ability to function and what you can and can't do.

Now is a good time to invest before the cycle fully recovers to put a plan in place.

You would need about a 30% return annually on your money to not touch the original 250k. Getting that passively isn't generally going to happen as most do best at 15% or so. You need some equity growth built in with your properties.

Chris R. · Answer

Thanks Joanna,  Working on it.

Cal C.

Current income $77k -14% for HSA, med insurance & IRA.

Son's Medical & incidentals ~ $700 a month.

appreciate feedback

Cal C. · Answer

Sorry to hear about your son.  I hope it recovers and quickly.

Since you didn't provide a couple of key details, such as your current income and how much are you paying out of pocket for your son's medical issues, any answer you receive here is basically guesswork.

But I think the most important thing for you right now financially is to get your costs under control as much as possible.

Then I'd start looking for things that will provide you income streams. Since you have contracting and estimating experience I'd try to flip some houses and in the meantime start building a rental portfolio that can support you in retirement.  Flip three a year until you turn 70 while buying and keeping one rental each year would give you six houses by your planned retirement.  If you can pay them off using the proceeds of the flips and assuming you are making a $1,000 in rent per house, then you'd have something like $3-4K per month in rental income.  That would continue after you and your wife pass, so if your son needs it he'll have it also.

Jonna Weber · Answer

I am so sorry to hear about your son. It sounds like you have some related experience related to purchasing property, but I personally would concentrate on a stabilizing everything else right now.  The right purchase is so critical, especially given your limited funds...and there is a learning curve to that.  There are a lot of moving parts to your situation - no solutions here, but I wish you the best.