Last night, I had a meeting with one of my clients who showed up for the first time without her husband. I am not a rocket scientist, but I assumed before we met that everything wasn't copacetic at their residence. I was correct. It appears that she is about to file for divorce and needed some advice about her financial situation. After 15 years of marriage, she and her husband had about $150,000 equity in their house and just a few minor bills. Both were making decent money. She had six figures in 401(k) plans, and he had at least three pensions that he would be receiving--not too tough a situation and certainly easy for me to analyze for her.
She said she didn't want any of his retirement and expects that he will not want any of her retirement. Because she makes more, she is liable for alimony for about 2.5 years which really only totals a small amount of money. He most likely will opt for retirement from his current job at 64 which is about four years away and will probably earn as much as he is now from the three pensions. She doesn't feel she will be able to retire because of finances for at least ten years which would put her at 65 years of age. (Retirement to her is reducing the stress of her current job and doing something more "fun" but not quitting work.)
Here is what I suggested would work best for her. She wants to sell the house, purchase a townhouse and go on with her life. She didn't know how much she should put down, what type of loan to take and whether she should continue making large contributions to her 401(k) plan.
She wants to buy a townhouse which would cost about $375,000. I suggested she put down 20% ($75,000) and take a 15 year loan. She can easily qualify for a 15 year which would have payments of about $2500 a month (high 5%). The loan would cost her about $650 a month more than a 30 year fixed. Her gross income exceeds $10,000 per month.
By taking the 15 year she achieves the following:
Monthy payment: $1850 per month
Payments for 15 years: $333,000
Balance in 15 years: $216,000
$2500 per month:
Payments for 15 years: $450,000
Balance in 15 years: 0
At age 70, she will have a house that is free and clear and her investment of about $118,000 in additional payments over the 15 years she will have made on the property will yield her $216,000: the balance she would have owed on the 30 year fixed. She should have enough money at that time, along with her social security and 401(k) investment, to live comfortably for the rest of her life even if her townhouse doesn't appreciate. (See "Appreciation doesn't matter" Dec. 4, 2006).
I advised her to continue to make the maximum contribution that gets the maximum employers contribution but nothing above and beyond that. I firmly believe we tend to put too much away in retirement plans and sacrifice some capital for needed expenses during our life. (See "Retiring the retirement plans" August 15, 2006). Her last concern was leaving something to her two grown children. My thought was that it was a worthy goal if you have something to leave but in all actuality, the very act of not being a burden on them when you are older is the best gift you can give. This can be accomplished with long term care insurance which is available for that reason. Anything beyond this plan is also great if you don't have to make an extra effort to get there.
A little humor usually helps to understand the situation. Many have said that a person who departs this world with a dollar in his wallet is destitute. Others might consider that same person a supreme financial planner. A friend of mine hopes that his last check bounces! Does following this philosophy mean you don't care about your heirs? Not at all. It means that if you raised them in the same way that my generation was raised, then you taught them to be self sufficient and work for what they want. In that case, you have given them all the help they will ever need.
I want to touch base with those who aren't going through a divorce and are just interested in finishing up their working career and looking forward to a sweet retirement. If you have reached your 50's, then it is time to really look at what you currently have, what you will need and to begin to develop a plan to get there. If you own a house, the answer generally is going to be to figure out a way you can get the mortgage down to a 15 year amortization. That alone will be most of the solution in the financial plan you are going to develop. By the time you are ready to call it a day and head out to play for the rest of your time on this earth, a free and clear house with some social security, some money in the bank, and a little retirement plan should be all you ever need. Of course, this all depends on the lifestyle you really want to live during those years but the above will definitely give you a stable foundation.
Like any race, it really doesn't matter how you start out; it's how you finish that counts.
You can erase a lot of hard-ache and financial pain if you develop the right plan and implement it to secure the type of retirement you would really like to have. It really is never too late so if you don't fall into the parameters I described above; simply expand them to make them work for your situation.
Be the captain of the ship, the master of your fate, and charge toward the sunset.
I'm right there with you!