The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.
If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.
Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.
Next in the series is FMF reader KC. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
We are a small family of three; myself (age 49), my wife (age 49), and our son (age 17). My wife and I have been married 21 years and both have been with the same employer for 25 years (public education). We have lived in the same house for over 20. In other words, we have a very stable existence.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
Financially, I feel more secure now than at any point in my life. Our income, before taxes, is 115k per year. Our only debt is the house, which we just re-financed at 3% for 15 years. We owe 106k on it and probably have only 25k in equity. The new 15 year mortgage pushed us back four years (we had 11 years @ 5%). My decision to extend the loan was not an easy one, but ultimately came down to cash flow as our monthly payment dropped $330/month. (I still am not sure that this was the best decision; payment dropped, less interest, but paying off the principle at a much slower rate). This (reduced mortgage payment) is money going towards college savings.
We carry no balance on our credit cards, but use them extensively to accrue frequent flier miles (have paid no interest in 4 years). All three cars are paid off and will serve us for years to come. We have 20k in cash savings for emergency funds that will ultimately go towards my son’s education. I am keeping it in savings, as the stock market bubble has not burst yet. Plus, this money may be used in the next 12-18 months and I want it liquid. We have another 20k in annuities and a Roth that will also go towards college (they can be withdrawn early, without penalty, if used for education). My wife and I both have state pension plans (11.5% of salary is contributed annually), so retirement is being taken care of.
As a side note, just five years ago, we had no money in savings and lived paycheck to paycheck. We also had a considerable amount of consumer debt. I did not sleep well in those days!
What are the current financial issues you're facing (saving, paying off debt, etc.)?
Our biggest challenge right now is college savings. I would like to pay as much as possible, but have discussed the plan of 1/3s with our son. Mom and dad pay 1/3, 1/3 in loans (that he is responsible for), and he works jobs for the other 1/3. Fortunately, our son is very bright and has (or will have) knocked off a year or year and a half of college while still in high school due to dual-credit classes. At $20k per year for a state school, this is a huge advantage. He also will likely qualify for a state scholarship (due to grades and SAT score) that is 6-9k per year, renewable. However, he wants to enter a program that requires a graduate degree, so his college years will be extended. We are currently putting away $1000- 1500 per month for college and retirement (apart from our pension accounts).
Our current monthly expenses:
What are your plans for the future (retire early, build your career, etc.)?
Retirement can come as early as age 52 for my wife and I. If we wait until 54 (30 years in the pension plan), the pension is considerably higher. I am thinking seriously about retiring at 52. I am a school principal and the job is taking its toll on me. Although I would retire from education, I would not quit working. There are no health benefits in the state retirement, so I would find part-time work to assist in paying for that and I am definitely too young to sit home and watch Oprah. My wife will likely continue working until 54, or beyond, at her current position. I have calculated that our pensions will allow us to live in a similar lifestyle as to what we currently enjoy. Social security would be a bonus.
I do not anticipate ever paying off my house and living in it rent-free. We have discussed several options for retirement; my wife’s family has a tremendous amount of property in the South that we could retire to and live cheaply (free). In fact, much of the land is leased or in government programs and produces income. My wife and I have also discussed retiring abroad; Ecuador, Belize, or parts of Mexico (contrary to news reports, most of Mexico is safe). We have travelled extensively to these areas, but fully understand that living there is very different from vacationing there.
No decisions will be made until our son graduates college (he is a high school senior this fall) and gets settled in a career.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
Do not get caught in “Keeping up with the Joneses”. Before the crash in 2007/8, many of our friends were buying huge SUVs, huge homes, boats, etc. They were way over-extended. Many conversations seemed to focus on what everyone else had and were buying. The crash resulted in several divorces and bankruptcies among our close friends. We almost made these mistakes too, but were fortunate to avoid them. Because of this, we weathered the recession unscathed. Live below your means!
In addition, take care of your credit score. Ours hovers between 770 and 815 and because of it, our last three car loans were at 0%, 0%, and .9%. Use sites like Credit Karma and Freemoneyfinance to educate yourself on how the system works.
If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.
Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.
Next in the series is FMF reader KC. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
We are a small family of three; myself (age 49), my wife (age 49), and our son (age 17). My wife and I have been married 21 years and both have been with the same employer for 25 years (public education). We have lived in the same house for over 20. In other words, we have a very stable existence.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
Financially, I feel more secure now than at any point in my life. Our income, before taxes, is 115k per year. Our only debt is the house, which we just re-financed at 3% for 15 years. We owe 106k on it and probably have only 25k in equity. The new 15 year mortgage pushed us back four years (we had 11 years @ 5%). My decision to extend the loan was not an easy one, but ultimately came down to cash flow as our monthly payment dropped $330/month. (I still am not sure that this was the best decision; payment dropped, less interest, but paying off the principle at a much slower rate). This (reduced mortgage payment) is money going towards college savings.
We carry no balance on our credit cards, but use them extensively to accrue frequent flier miles (have paid no interest in 4 years). All three cars are paid off and will serve us for years to come. We have 20k in cash savings for emergency funds that will ultimately go towards my son’s education. I am keeping it in savings, as the stock market bubble has not burst yet. Plus, this money may be used in the next 12-18 months and I want it liquid. We have another 20k in annuities and a Roth that will also go towards college (they can be withdrawn early, without penalty, if used for education). My wife and I both have state pension plans (11.5% of salary is contributed annually), so retirement is being taken care of.
As a side note, just five years ago, we had no money in savings and lived paycheck to paycheck. We also had a considerable amount of consumer debt. I did not sleep well in those days!
What are the current financial issues you're facing (saving, paying off debt, etc.)?
Our biggest challenge right now is college savings. I would like to pay as much as possible, but have discussed the plan of 1/3s with our son. Mom and dad pay 1/3, 1/3 in loans (that he is responsible for), and he works jobs for the other 1/3. Fortunately, our son is very bright and has (or will have) knocked off a year or year and a half of college while still in high school due to dual-credit classes. At $20k per year for a state school, this is a huge advantage. He also will likely qualify for a state scholarship (due to grades and SAT score) that is 6-9k per year, renewable. However, he wants to enter a program that requires a graduate degree, so his college years will be extended. We are currently putting away $1000- 1500 per month for college and retirement (apart from our pension accounts).
Our current monthly expenses:
- Mortgage 834
- Son’s health insurance 118
- Cell bill 77
- Utilities 200-300 (water, sewer, gas, electric)
- Satellite/internet 110
- Fitness memberships 70
- Cash 600 (gasoline, personal care, son’s allowance, etc)
- Groceries 700 (our son eats A LOT)
- Household 700 (toiletries, beauty, entertainment, junk)
What are your plans for the future (retire early, build your career, etc.)?
Retirement can come as early as age 52 for my wife and I. If we wait until 54 (30 years in the pension plan), the pension is considerably higher. I am thinking seriously about retiring at 52. I am a school principal and the job is taking its toll on me. Although I would retire from education, I would not quit working. There are no health benefits in the state retirement, so I would find part-time work to assist in paying for that and I am definitely too young to sit home and watch Oprah. My wife will likely continue working until 54, or beyond, at her current position. I have calculated that our pensions will allow us to live in a similar lifestyle as to what we currently enjoy. Social security would be a bonus.
I do not anticipate ever paying off my house and living in it rent-free. We have discussed several options for retirement; my wife’s family has a tremendous amount of property in the South that we could retire to and live cheaply (free). In fact, much of the land is leased or in government programs and produces income. My wife and I have also discussed retiring abroad; Ecuador, Belize, or parts of Mexico (contrary to news reports, most of Mexico is safe). We have travelled extensively to these areas, but fully understand that living there is very different from vacationing there.
No decisions will be made until our son graduates college (he is a high school senior this fall) and gets settled in a career.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
Do not get caught in “Keeping up with the Joneses”. Before the crash in 2007/8, many of our friends were buying huge SUVs, huge homes, boats, etc. They were way over-extended. Many conversations seemed to focus on what everyone else had and were buying. The crash resulted in several divorces and bankruptcies among our close friends. We almost made these mistakes too, but were fortunate to avoid them. Because of this, we weathered the recession unscathed. Live below your means!
In addition, take care of your credit score. Ours hovers between 770 and 815 and because of it, our last three car loans were at 0%, 0%, and .9%. Use sites like Credit Karma and Freemoneyfinance to educate yourself on how the system works.
Seems that you have it fairly well together. I would question the grocery and household bills in that they seem very high for a family of three that have been living in the same home for many years and that you have a large cash outlay that would likely include much of what I would have included in "household". If you feel the need to squeeze more towards retirement and college those appear to be good places to draw from.
I'm glad to see you're putting a lot towards retirement outside the pension, better to have a good buffer if they start messing with the future payout or if nothing else you can't expect COLA's to really keep up with actual inflation over 30-40 years in retirement.
That said, it's good you are able to retire early, but you might want to consider doing something else full time instead of part time when you do leave, at least for a couple more years. You're still plenty young enough and have a large skill set that you could use. Just don't rule it out unless it's what you really want. I've seen plenty of folks leave, thinking they'd do part-time or no futher work only to be offered short, two or three year projects that they can get excited about and they pick up and start working full time again in a similar, but new area.
Best of luck.
Posted by: getagrip | August 08, 2013 at 08:45 AM
Sounds like you're on a track and have a pretty good vision for the future.
I would guess whatever work you do after leaving your current position won't be a walk in the park either. I wonder if you would regret leaving before 54. The pension difference is probably significant.
That was the only thing that didn't seem to fit your overall plan.
Posted by: Paul | August 08, 2013 at 09:31 AM
The expenses listed and $1500/month savings only adds up to about $60k total per year. Yet you make $115k combined. Even with 11% pension + taxes we seem to be missing some money. Maybe there are other paycheck deductions we're not seeing?
Your spending seems reasonable to me given the income.
The 1/3 split idea for college is reasonable. You'd probably qualify for tax credits for college costs. American Opportunity Tax Credit would pay you $2500 but I think its expiring, but that leaves the Hope Credit that I think would pay $1800.
Good think you've got those pensions.
Posted by: jim | August 08, 2013 at 01:58 PM
Jim-
Good job on the math. I have just over $200 a month put into an HSA. We actually have just over 2k that we could put into savings, but history has shown that approximately $500/month ends up elsewhere; we usually do two vacations per year, expenses pop up (last year 5k on my son's mouth for braces and wisdom teeth)unexpectedly. I just know that only $1500 will actually make it into savings each month.
I just read about the AOTC last week in Forbes. The entire college game has changed since I went over 30 years ago.
We are very fortunate to have state pensions- in a state that is fairly solvent in their pension fund.
The giant widcard is health insurance after retirement- that frightens me.
Posted by: KC | August 08, 2013 at 04:39 PM
Sounds like you are on a great path! More and more it seems like "Don't Keep Up With The Joneses" is about the best financial advice to get and to live out. If all you do is just buy a house/car/etc that you can afford, rather than what you "want" or think you need, the financial savings over your life will be enormous!
Posted by: Jon | August 09, 2013 at 04:37 PM
As a public sector worker myself, I'm more than a little leery about your complete dependence on pensions for your retirement income. I know it's late in the game, but it seems like you could put something away into retirement funds for the long term as a "Plan B". Even if your state has rock solid finances(which few of them do), I guess, philosophically, I just can't support the idea of relying 100% on an employer sponsored pension.
Posted by: Mark | August 10, 2013 at 08:41 PM