Reaching that milestone would go a long way to improving his retirement readiness. It would drastically reduce his monthly bills and limit how quickly he needs to draw down on the $130,000 stashed in his retirement account. Taylor says it would also free up cash for him to travel with his wife, take some PhD-level courses that interest him or invest in his new hobby of remodeling old cars. “By the time things are paid off, if there is a little money in the bank I might be able to go do something nice,” he says.
We shared Taylor’s information with two financial experts, Kathleen Hastings, a financial adviser at FBB Capital Partners, and Jeanne Thompson, a vice president at Fidelity Investments, and asked them to offer thoughts on his plan.
The big picture
Taylor is the main provider for his family, which lives in Staunton, Va. In addition to supporting his 60-year-old wife, who cannot work because of a disability, he is paying a car loan and its insurance for his daughter, who is working her way toward financial independence. A second daughter is living in a house that was left to Taylor by his father, and that is worth about $110,000.
While he is still working, Taylor hopes he can pay down his debt. His monthly bills amount to about $4,000, including a $750 mortgage payment, about $600 on groceries, an average $580 on cable and utilities and about $600 on dining out and other cash purchases. His car payments add up to $950, and he has about $500 in minimum payments on his credit cards, though he usually pays $1,000 to $1,400 each month to clear the debt more quickly. If he can pay off his debts, his expenses will come down to $2,000 a month in retirement.
With his $45,000 salary from the university, the $30,000 he and his wife receive annually in Social Security benefits and the $7,200 he receives annually from a National Guard pension, the Taylors can afford to make the large debt payments. But that will change once he stops working.
Their Social Security benefits will increase to about $34,000 a year after his wife transitions to retirement benefits from disability payments at age 66. He will collect a pension from his job at the university, which could bring in $9,600 a year if he works for another five years. He could also tuck into his savings; drawing down 4 percent a year could yield $6,000. Still, that would leave them with about $25,000 less than they make now.
Taylor wants to know if he is right to focus on the debt, which he and his wife built up over the years. He’s also hoping
to leave assets for his children when he dies, and he wonders if he should make any changes to his retirement savings now to provide more for them later.
Time to cut back
Both Hastings and Thompson said Taylor should target that credit card debt, which incurs higher interest charges than the car and mortgage loans. If he were to pay only the minimum on his credit cards, which are charging 9 percent and 10 percent interest rates, he would pay $5,500 in interest and it would be at least 12 years before he was debt free. “Not all debt is the same,” Thompson says. “You want to focus on the high-interest debt or consolidate your debt into a low-interest vehicle.”
Taylor worries about leaving something for his children, but the priority should be his own financial stability first, Hastings said. “I’ve always believed that the best gift you can give your child is not necessarily money but to make sure you are financially sound,” said Hastings, adding that parents who put their children’s needs ahead of retirement planning can end up needing help from their kids later.
Taylor needs to think seriously about what bills he can eliminate, so that he can pay down more debt quickly. That may require scaling back on the assistance to his children, Hastings said. If his daughter takes over her car payments, that would free up about $300 a month for Taylor to pay down credit cards. If she can’t afford to pay for the car now, they should look at selling it or plan for her to take over the payments when he retires, she says.
Selling the house that his father left to him – the one his daughter is living in now – may also help Taylor clear his debt and pad his savings, Thompson said. Of course, that would increase the living expenses for his daughter, who pays the utilities, taxes and insurance on the home. The family needs to determine if that is a change they can afford.
Taylor says he plans to sell the home “when the time is right,” and after both daughters, who are in their 20s and early 30s, have had a chance to live there. He also says he plans to sell one car when he stops working, which would end another $300 monthly payment or add to his savings.
Staying the course
Taylor wondered if he should convert his 401(k) to a Roth IRA so that he wouldn’t have to take required mandatory distributions from the savings after he turns 70 1/2. Roth IRAs can also be favorable for leaving money to children because beneficiaries do not have to pay taxes on the savings as long as the account has been open five years. Still it would be a costly move. Taylor would have to pay the taxes on his savings now if he were to convert to a Roth IRA, which consists of after-tax dollars and can be withdrawn tax-free in retirement, Thompson says.
He may also find himself in a lower tax bracket after he stops working, Hastings added, which would make it smarter for him to hold off and pay taxes as he withdraws the money in retirement. “I know he wants to help his children, but this is not the way,” she said.
Instead of making that major conversion, Taylor should keep working and making pre-tax contributions to his retirement account, which can help to lower his annual tax bill, Hastings says. If he were to die in an accident, his wife and children would benefit from his life insurance policy.
The Taylors never bought long-term care insurance and that coverage may be unaffordable to them now because of his age and because his wife has a disability, Hastings said. If their medical costs climb in the years ahead, Taylor could sell his father’s house and use the proceeds, along with some of his savings, to cover expenses. They may also want to chat with an adviser or estate planner at some point about other strategies for protecting their assets while they cover medical costs, Hastings and Thompson say.
Until then, Taylor should keep working and saving with the expectation that any savings he and his wife don’t use can be left to their children, along with their house, Hastings said. “They need to preserve and try to grow their resources for their own retirement,” she said. “Leaving money to their children should be a secondary consideration.”
In Finance Lab, we pair frustrated readers with financial advisers. Want to participate? Tell us your story.