Reader Profile: GF

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 GF. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I'm 57 and married. My wife of four years is 63. We live in Tampa, Fl and I've owned the home for 24 years. I have one son (23 years old), from my previous marriage, who is on his own and living in England at the moment.

I served in the Air Force for four years, got out, and with the GI Bill and a side job put myself through college at Florida Institute of Technology so I came out with no student debt. I was employed in the marine aquarium field for about 10 years, then got married and had my son and discovered it was time to make some real money. I came back to Tampa from the Virgin Islands and fell back on the second part of my degree in environmental technology and have been employed in the environmental laboratory testing business for the past 20 years. I've experienced several business cycles, some layoffs (for others, not me, thankfully), several buyouts and name changes and one outright closing of the lab that I worked for. I was hired within a month at our sister lab in the same city so have technically been with the same company for 20 years, although when I was rehired, for the same position, I had to take a 30% pay cut. I recovered all that and more in about three years.

My current wife has had some misfortunes along the way, both personally and financially and for all practical purposes has no real personal savings to speak of. She is a hard worker and very good at her job but really doesn't handle money all that well. But at least she has no debt! We aren't big spenders and do a pretty good job of staying within our means. Our only “vice” being good food and wine!

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

My wife makes enough right now to cover her basic expenses as well as our cable/internet/cell phone bill and her insurance. She also contributes to the food and takes care of our dog. She was let go through downsizing about a year ago and suffered about a 40% decrease in income, having only found this job three months ago for $14/hour as a temp to perm. position. It's undecided if she'll keep this job as she must spend about $240 a month in tolls and gas just to get to it and back!

I make about $42,000 a year, $2300 take home a month, and am responsible for the major bills and any emergencies that should arise. The breakdown follows along these lines

LIABILITIES:

• Mortgage (w/taxes and insurance) $700/ month ($32,000 left on the note with about 5 years to payoff). Interest rate is 6 %. I haven't refinanced recently as I'm not sure it would be worth it. I pay extra on the principle on occasion.
• HELOC $350 Interest only loan with a 10 year draw at 3%. Right now the interest payment is about $160 but I usually pay $350 to help whittle it down. There is a balance of $45,000. Almost all the money went to much needed repairs and upgrading of the property including a new roof, AC and kitchen.

EXPENSES:

• Visa usually 0
• Church tithe $240
• gas $40
• food/wine $350 (we tend to splurge a bit on weekends)
• misc. (gardening, entertainment etc.) $100
• electric avg. $85
• water/sewer $60
• car insurance $78

ASSETS:

• Home : value about $150,000
• 401k: $65,000 (I've contributed anywhere from 3 – 15 % into it over the years depending on the economy and personal economic situation. (kids braces and things of that sort)
• cash: $75,000 (from recent inheritance)

What are the current financial issues you're facing (saving, paying off debt, etc.)?

Current financial issues we face are retirement and what to do with the $75,000 cash that I only received last month. Right now it is serving as an emergency fund in a savings account earning very little interest.

I'm a fan of Dave Ramsey and am tempted to pay off the mortgage ( a fixed value every month) and a substantial portion of the HELOC. But I did have someone advise me to keep the cash that I have as it would take some time to “save back” the cash and I'd be hamstrung in an emergency situation. At this stage of the game I'm saving for the both of us. My wife could retire next year and I have at least 10 more years.

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?

The best piece of financial advice I've ever learned, and adhere to, is “pay yourself first”. I love the book The Richest Man in Babylon.

I've seen the rise of gold and silver (early eighties) and I've seen them fall. I've seen the rise in stocks and seen them fall (substantially!). I've tried penny stocks, individual stocks, and mutual funds. And now with the state of the economy, and the world in general, it really makes one think, “just what is safe anymore?” Anything? I've come to the realization that simple is almost always better and that a plain Jane vanilla index fund is probably the way to go. Since they became available to me in my 401k plan, I've embraced the Vanguard Balanced, Small cap, and Mid-cap funds.

Comments

[Jon]

Ok. Simple math - without even thinking about what to do with the inheritance, instead of paying extra on the HELOC, put that money towards the first mortgage - 6% debt vs 3%, unless the interest rate on the HELOC rises above 6%.
My wife and I are close to your age, and when we received a small inheritance, we placed the money in an ETrade brokerage account. If you do something similar, with a no to low fee brokerage, you can select very conservative investments to safeguard your principle, and have the money available as an emergency fund.
If you're a Dave Ramsey fan, you know he says 3-6 months in the emergency fund, so I think $75K might be a bit high for that, but if you expect your wife may quit her job soon, it might make you feel safer. If you both plan to work to full retirement age, then a portion of that money probably needs to be in some index funds, growing and tracking the markets, to beat inflation.
With the short time frame to retirement, I think you both ought to be focused with "gazelle intensity" on saving as much as you possibly can for that time. Probably ought to start up a side hack of some sort, too.

[Chadnudj]

If I were you, I would:

1. Pay off the house mortgage. 6% interest guaranteed? That's a pretty good guaranteed rate of return. That would leave you with $43k in cash, plus free up $700 a month from your cash outflow.

2. I'd take $300 or so of the extra $700 a month and add it to the $350 you pay each month on the HELOC, to really start whittling that down.

3. With the $43k in cash I'd first fund Roth IRAs for you and your wife to the maximum for 2013(since you're both over 50, that would be $6500 for each of you). But in another $13k ($6500 for each of you) on January 2 for 2014. Do it in Vanguard, and invest it in something like the Balanced Fund for both of you (which is probably a reasonable risk profile for your age/income/situation). That would leave you with $17k ($43k - $26k)

4. With the remaining $17k, I'd keep $7k in cash as an emergency fund (reasonable since you've now reduced your liabilities substantially and thus your need for cashflow). Take the other $10k and invest it in a taxable account, again probably with Vanguard Balanced.

5. With the extra $400 a month still not accounted for, increase your 401k contributions. You don't mention if you receive any type of match, but if you do, you DEFINITELY need to be getting the full amount of that.

Not a perfect plan, but a really good one, I think, for you and your wife.

Also, you need to start thinking about the proper order/way for you and your wife to claim Social Security. That's a complex issue, but keep in mind you want to delay it as long as possible (and certainly to age 67 when you get full benefits) so that you get the best cashflow possible (and thus protection if you live longer than average).

[JimL]

I woulay off e mortgage and HELOC and be totally debt free. That would also remove the temptation of spending the inheritance windfall on something else. Take the monthly savings and build up your 6 month emergency account. It won't take long given your revised cash flow. After that, max out your retirement.

As for your wife, she needs to keep that job, despite the tolls and gas. You both cannot afford to be without her income as you need to build more savings. Meanwhile, she should search for something else with better pay and lower expenses.

[JNEW]

Hi GF:

Here is my 2 cents.

*First of all, You need to be seriously thinking about the near future--- the day when you do not or cannot work anymore. It is right around the corner and I think your #1 question needs to be how will you cover your expenses after you and your wife retire and your paychecks are no more?

Income Now: $70K total---- you make $42K and your wife makes $28K( assuming she works full time at $14/hour for 50 weeks).

Take home Now: $3900 total -- $2300 for you and $1600 for your wife (my guess).

*EXPENSES Now: $2403 total---Your expenses that you need to cover are $853 PLUS the amount your wife covers at $500 (my estimate) PLUS the two loans at $1050--- for a total of $2403. (Probably more.....What about home insurance? property taxes? medical co-pays/premiums? Cash spent?)

*Retirement expenses: $3000-$3500. Lets say you have the same expenses of $2400/mo and add $500 to $1000 / mo ($3000/$3500) month to be really conservative.

*Retirement income?: I am not sure the amount you will get in social security ( you need to check this out)--- but I can guaranty you that it will not be $70K like you earn now. So you are either going to take a serious hit in income or figure out a way to make up the shortfall. Lets figure out how to make up the shortfall.

Making up the Shortfall:
** (work longer) I think you and your wife need to resign yourselves to keep working until you are each 70. Only another 7 years for your wife. But she should keep the job she has or change to a closer better paying job if possible--- but don't quit unless she is actually unable to work (sick/ disability). That will ensure that you get the largest monthly income possible from social security. Every year you delay beyond age 66 increases your social security payment by 8%. You need to take advantage of this. When she files at 70--- you can file for a spousal benefit from her at half of her amount. Do this and invest it !

**(refinance debt)-- I am usually a fan of paying off debt-- but in your case I am hesitant to use all the cash to do so. I am proposing that you take the mortgage and the HELOC (total of $77K) and refi it immediately into a new 1st mortgage for 30 years ( or longer). A 30 fixed year note for $77K at 4% will run you about $370/ month. That compares to the total of $1050 you spend now on the two loans. A LOAN SAVINGS every month of $680. You should do this now while you are fully employed and rates are at historic lows.

** ( Invest Loan savings) Take the $680 savings from the refi and invest it every month into a Vanguard account. The particular investments are up to you based on your risk tolerance but I am a big fan of the Vanguard balanced that has been mentioned. If you do this for the next 13 years until you are 70 (and ready to take SS) you will have $151,000 in this account assuming a 5% interest each year.

* ( invest Inheritance) Take the $75,000 you have and dollar cost average this money into another Vanguard account Ill call the INHERITANCE ACCOUNT( $6250/ month for 1 year). That $75000 will also grow to about $141,000 if you let it compound for the next 13 years until you are 70 years old ( assuming 5% returns). You probably should max out ROTH IRAS for you and your wife with this money ( to save taxes in retirement) and put the balance in a taxable account.

* ( 401k) make sure you are MAXED out on your 401K at work. You already have $65000 in there. If you max out for the next 13 years, my quick calculation says you could have $200K + in that account at that time (when you are 70)

*(your retirement income) If you follow my plan-- at age 70 your income will look like this:

$25000- your ss ( just a guess)
$15000- wife's SS ( just a guess)
$8,000- 4% drawdown of $200K 401K account
$5640- 4% drawdown of Inheritance Account of $141K
$6040 4% drawdown on Loan Savings Account of $151K
--------
$59,680/year RETIREMENT INCOME AT 70 Years OLD

$4973/ mo Gross
$3729/ mo Take Home

This seems to work. But you need to start NOW and you need to focus like a laser on savings and growth of net worth for the next 13 years.

Good luck.

JNEW

[Old Limey]

You didn't mention HEALTHCARE in your profile. Having good healthcare becomes a very important asset as you get older, as well as being very expensive for a lot of people. I'm amazed that at 57 and in a technical field that your income is so low. I retired in 1992 at the age of 58 and was earning $75,000/year 21 years ago as an engineer.

I haven't had any major health issues and I am now 79 but my 80 year old wife has had four major surgeries. The last surgery involved a 2 week hospital stay with a total bill of over $200,000 but our insurance picked up everything except for a $1,000 copay for inpatient hospital care.

Divorces can also be very expensive, fortunately we have now been married for 57 years and are extremely happy. Our three children however have each been through divorces.

You mentioned that you like "good food and wine". We also feel the same way but we eat mainly at home these days and like our bottle of wine with it every evening. Wine is very cheap if you like chardonnay, but not so if you are a red wine drinker. We can get an excellent chardonnay for the case price of $2.48/bottle at three local supermarkets - Lucky, SaveMart, and Trader Joes.

[jim]

GF, you say : "$14/hour as a temp to perm. position. It's undecided if she'll keep this job as she must spend about $240 a month in tolls and gas just to get to it and back!"

$240 a month is a lot. But she's better making $14 an hour and paying for gasoline and tolls than making $0 and being unemployed. If she can find a closer job paying say $12.5 or more then it might be worth quitting the $14 job. But right now she's making plenty to pay that gas/toll bill.

Chadnudj and JNEW both have a lot of good points. I do think you should either pay off that mortgage in full or at least refinance the mortgage and HELOC into a single fixed rate loan.

[Erik]

GF,

You have received a ton of good advice here. I'd fall into the camp of trying get rid of your mortgage debt as fast as possible. Windfalls like this are a great way to remove large debts.

One thing you wrote stuck me: "My current wife has had some misfortunes along the way, both personally and financially and for all practical purposes has no real personal savings to speak of. She is a hard worker and very good at her job but really doesn't handle money all that well"

Assuming we don't count your 75k inheritence that you just received, I'd say you both don't handle money all that well. You certainly are in better shape with around 75k of home equity and around 65k in a 401K but that is 140k and only around 3 times your annual income saved at the age of 57.

Without factoring in SS you would need around 25 times your income (really expenses) saved by retirement. Hard to come up with an exact number when considering SS but if SS provided half your current income you would still need around 12 times your current annual expenses in savings. (Home equity can count here as a paid off house reduces your monthly expenses in retirement.)

I'd make the most of this windfall, along with your time to save without supporting any children to get on track for retirement. Try to get to a net worth of around 500k in today's dollars so by the time you retire around 600k in around 10 years.

[GF]

Thanks for all the great advice! Some good ideas, some I hadn't considered. The primary mortgage will be paid off! That will be my first goal.

Old Limey's point on healthcare is a good one. At this point, with O-Care, it's anybody's guess as to what will shake out as far as cost and coverage! My wife and I are both healthy and active (knocking on wood :) ) and will try to remain that way.
Also to the point about low paying tech field, I hear you. In the late 80's to the mid 90's the field was on fire. Then automation stepped in in a big way and has continued to drive the market. We are doing triple the volume of tests for half the price!

@Erik: ref: not handling money well, I take your observation, and on the surface it certainly appears that way. As Old Limey pointed out divorce can be expensive. It wasn't terribly so in my case (ten years ago) but I did give up an IRA, took a pay cut of 30 % and have paid cash for all house improvements, sons braces, a working car for him his Senior year, and other stuff that just comes up in life and have always had cash for emergencies, but your point is acknowledged.

And my wife and I had a discussion just the other day that if she isn't made a perm at this job she will look for something closer to home that pays at least as well and hopefully better.

Again, tks for the comments, they have helped tremendously.

[Old Limey]

You are listing $953/month under expenses.
Then $700/month for your mortgage, property taxes, and insurance.
Then $350/month for your Home Eqity Line of Credit.

This totals $2,003/month.

Your take home pay is $2,300/month, leaving $297/month unaccounted for.
This doesn't leave much for building a goodly sum of money by the time you want to retire. I would think you might want to consider whether the church needs $240/month more than you do in order to be able to retire in 10 years. There are also unexpected expenses that come along as well as state and federal taxes that you didn't mention. You may also have to eliminate splurging until your balance sheet looks a lot healthier. Personally I would be quite worried if I were in your shoes.

[GetRichWithMe]

I love the fact that you include solid, normal, average people in your profiles as well as the headline grabbing millionaire profiles.
They make just as good reading.

[JimL]

GF,

I agree with Erik. Understanding that you had a divorce and other things come up, you can see that money can fly out the door at unexpected times. Paying off those off and then committing to never borrowing again will have a significant impact on your finances. Take the immediate boost in cash flow and throw it all at your retirement.