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QUESTION:

I need some advice, I am 51 and my hubby is 53. He was seriously hurt in a car accident and have no money saved for retirement, we have had to use it all to live on this accident happen 3 years ago.

We will very soon be getting a large sum of money or at least large to us. We need a car right now we have no transportation we were also wondering would we be better to keep renting or buy a home so we know we will always have a home if anything would happen. Our worry about buying is the up keep, in an apartment we would not have that. But then again money does not last forever and we cannot live on 1000.00 a month.   PLEASE HELP!  Cash Settlement Coming

ASK YOUR MONEY'S ROSEMARIE BOYD ANSWERS:

Dear Cash Settlement:

Your caution is well placed.  These are very difficult decisions.  Let me see if I can help you to design a framework which you can use to make these decisions.  I find that, just like we need a road map to show us driving directions, we need a map to help us make the proper decisions financially.  Once we have that map, believe it or not, the decisions are not that difficult to make.

First, if your husband is not receiving Social Security Disability benefits, you should seek professional help and apply those benefits.  If rejected, you should follow with an appeal.

Second, I am assuming the lump sum is part of a settlement.  If that is the case, IT IS CRUCIAL TO FIND A PROFESSIONAL  to help you decide whether lump sum or income options would work best for you.  Work with an independent accountant or financial planner.  Independence is crucial here.

Road map to help you achieve your goal.

1.       Make a detailed budget of what it costs you to live right now.  Then create a budget that shows the changes if you own a house and have a mortgage with which you are comfortable, if you buy the house outright or  if you rent.  Remember, house can be a condo as well.  This changes some of the expense numbers.

2.      Based on that budget, do a cash flow for each scenario to determine whether you have surplus, shortfall, or are at break even.

3.      If you have a shortfall, a very conservative way to plan for income would be take that shortfall and divide it by .04.  This gives you a lump sum required to keep you going for as long as you live.  The .04 represents a 4% draw on assets or drawing interest only.  Make sure you leave 30K as an emergency fund.

Not knowing how much of a lump sum you will be receiving, I can’t tell how realistic a 4% draw is for you. If it is not realistic, you need to do some projecting into the future.  How much do you need to go to age 90 as an example.  Then make plans accordingly.  However, don’t forget, you may live to be 100 so you don’t want to deplete asserts by age 90.  What this will do is cause you to think about whether expenses will decrease with age.   This, in  fact, tends to happen as people become less active.

This is also why it is so important that, should this be a settlement, you make the right decision relative to lump sum or income.  Often the income choice gives you more money in the end

4.      Renting versus buying:  It is good that you are thinking about this very carefully and are not in lock step with the prevailing opinion that buying is the only way to go.  As the real estate market has taught us over the last few years, some people should not buy because they cannot afford it.  Nothing wrong with that!  I’d rather rent and know that I have no financial stress, then have to constantly be concerned about the next mortgage payment.

Factors to consider in making this decision:  Put these numbers in your three expense scenarios.  Don’t be afraid to rent for one year and reevaluate at that time. 

·         Maintenance costs.  You have identified the problem.  Normally, you would both be able to pitch in for a while longer and save on those costs.  However, given you husband’s disability, you will most likely have to spend more on maintenance.  In addition, routine issues such as, a new roof, new heating system etc.  can add to the bill.

·        Compare these costs to what a Condo fee would be. 

·        Compare to renting.  For renting, I would add 5% per year for rent increases.  In a better market this could go much higher so you need to remember that.

·        Consider which best meets your life style and go with you comfort level.

·        Go back to #1, #s 2 & 3 above.  Determine what happens if you pay cash for a home.  Does that still allow you to meet your income needs based on the formula in #3.  How much of a mortgage can you comfortably take on?  #1,#2 & #3 will address that as well.  If you make a down payment, m.ake sure you satisfy the requirements in #1,#2 & #3.

5.       Make a decision that will allow you to sleep nights!!  Does not matter which way you go, but it does matter that you are comfortable with that decision.

Best of luck and thank you for your very thoughtful question.  Rosemarie Boyd, CFP

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