dazed and confused - save for kids college/retirement/pay off house/quit job - ?

[mstryin]

Hi all,

I am a very new person here and just starting to begin the transition from my previous, self destructive,  spendy ways.  But, I'm so scattered, I'm not sure how to set our long term goals - and I feel like I need them to keep motivated...here's the particulars.

**already past "early retirement" - I'm late 40's husband is late 50's

**2 kids - 16 & 11 - I want to help out kids with college...
**husband retired - collecting a defined benefit pension plan - he is the driver for the kids - we live in country - and love our house very much
**I work part-time - at a job I dislike - AND I commute 35 miles each way - not ideal for sure - but this really is a rural area and options are very limited
**2 years ago we moved to the rural midwest to be near my aging parents (dad's 90) and we thought it would be a lower costs of living from the city.  We were wrong - for the most part - a gallon of milk costs the same as in the city.  Rude awakening.  But we do like our life better here and I am glad we can be here to help my parents and see the rest of our large extended family.
**I have been trying to get employment near my home for 2 years now...and will keep trying to reduce commuting costs and earn more

so here's the particulars from a $$ perspective.

my husbands gross is 100,000 and (at the moment) goes up each year by 3% - I will also receive his pension if I outlive him, but I will not be eligible for the cost of living increase each year - the benefit "freezes" at the time of death to whatever that fixed number is. (of course, I live in fear that with pension reform storming the US - we could be hit. - he was not permitted to pay into social security - so the pension is it for him.  But the 'experts' say that current retirees will not be affected by any reforms.)
my gross is around 50,000
we have 175,000 in retirement accounts
we own our cars (old/high mileage)
we do not own our house - we owe 200,000
we have about 100,000 in equity in the house (just bought 2 years ago on a 30 year)

From this we pay:

13,000 in medical insurance costs per year (I know it's crazy - daughter and husband have medical issues)
24,000 in housing - mortgage/taxes/insurance are 1,500 per month - we pay an additional 500.

In the past, CRAZY living expenses to the point that we have nothing really saved in the past 2 years - yes - I know it's insane - that's why I'm here and looking to change our lives.  It's never too late right??

My immediate goal is to cut our expenses so that we live off of husbands take home only (5,900) this is very doable - I just cut 500 from our first months' grocery bill by planning and paying attention!  So I know by implementing more changes we will get there.  My goal is to have this accomplished by September at the very latest.

second goal is to stash some money in a vanguard index fund - earn money on the emergency fund.  Maybe about 10,000.

Then the big questions come in:

If we can save all of my take home (apx 3,000 per month) and even some of his pension, what should we do with it?

Throw everything at housing to pay off the mortgage?  College planners say kids who's parents have mortgages get more non-loan financial aid - aid is good.  But I must say the oldest also really likes the idea of studying overseas...and have heard it is cheaper - bonus.

put it into investments - and if so, IRA's or something more liquid?  I like the tax write off for IRA's and hubby is only 2 years from 59.5.

put it into 529 plans (college savings accounts)

Should i quit?  I really do not enjoy my job, but I like to work.  This also pulls into play the whole college aid thing - me quitting would reduce our income....not hugely, but maybe just enough for the oldest to still qualify for some need based scholarships.  But I like the idea of using my income to really impact our lives.

I feel like I need to have some long term goals here to be and stay motivated - but I'm not sure where to go with this.

thanks for opinions....

[electricworm]

I wouldn't keep an emergency fund a stock index fund. Typically that's kept in a savings or money market account so the money is easily accessible when the emergency arises. it'd be a real shame to have to sell stocks in a down market and take a loss. Short-term bond index fund may be right for you if you are willing to take a bit more risk for greater yield than a savings account.

I think you need to define your goals before you can really make a plan. Do you want to retire soon or do you want to send your kids to college? Potentially you could do both, but not without substantially reducing your living expenses. 300k for a home in rural midwest seems a bit steep. You should make a budget and track all expenditures. Figure out where the money is going. You should be able to live off less than $5,900 per month. If $2k is for house expenses, where is the rest going?? No car debt, but do you have other debt? $3,900 on groceries, utilities, gas and miscellaneous is crazy.

You could potentially live another 50 years easy, especially considering your dad is in his 90's. I think you should continue to work and save for retirement while you can. You should save in an employer's retirement plan, if available, to reduce tax liabilities now. or in a roth ira.
Do you want to stay in your house after your kids leave? If you think you'll be there for a long time, then it makes sense to pay it down quickly. If you might downsize or move elsewhere, I would just pay minimums and save/invest the rest. Doesnt make sense to pay down a house that youre not planning on staying in.

 

[mstryin]

"$3,900 on groceries, utilities, gas and miscellaneous is crazy."

you are absolutely right!  Thus finally becoming aware and doing something about it. 

thanks for the advice on the index fund vs money market.  Point about selling in a down market is very well taken.

I think if I were in a better job that I actually enjoyed, I would be happy to work to mid-fities or later to get the youngest at least started (if not finished) in college.

I am a contract employee and cannot participate in my employers retirement plan. So any investment is on me/spouse.  I have been actively applying for work for 2 years. 

I truly do not know if we will stay in this house after 10 years.  the taxes are about 4,000 a year now with insurance 1,200.  If the house were paid for, it would be fairly cheap to stay here.  However, after my parents are gone, I can also see us living in another area - closer to, or in town so that we don't have to drive so much.  Maybe in a better climate.  My Dad lost his license due to minor health issues last year and since he lives in the country like us, his life was terribly affected by his inability to drive - I don't want that to be me in 45 years. 

[Another Reader]

What is the interest rate and term on ther mortgage?  Could you benefit by refinancing?

If I was not sure about staying in the house long term, I would fully fund whatever retirement accounts are available to you instead of paying down the house.  You won't pay it off in your remaining working years anyway.  Refinance if it makes sense (calculate the payback period for costs), but I would not pay it down if you have better investment alternatives.

[mstryin]

Our interest rate on the 30 year fixed is at 3.75%  - great rate.  I think my husband wants to pay it off so that we can then take that 2K and spend it elsewhere or save it.  But it does seem to be very, very cheap money....if we get a very possible 6% return on dollars invested elsewhere, we're ahead of the game by 2.25%.  Real estate used to be a solid investment - you could count on your house appreciating while you paid the mortgage down.  But I also worry about whether our house will appreciate since it's in a rural, niche area.  Many of our neighbors have their houses as second homes. I'd hate to spend good money after bad.

But there is that attraction to actually owning the house outright - and having that additional money free to pay current living expenses or to save. 

[nktokyo]

Always an awkward question but if your parents do pass away in the next couple of years what kind of an inheritance can you expect?

Beyond that...

What is your net income after commute costs, lunches, parking etc?

Saying that you'll "get by" on a $100K income is nuts. I live in central Tokyo and spend $35-40K per year. Where is the money going? Do you have crazy phone/internet/cable/entertainment bills that seem to be the craze these days? I would target cutting your costs by 50%. Pretend to be poor for a while and what your savings stash pile up to the sky. You can always add stuff back on later at your own choice (hint: you probably wont).

Why do you feel the need to help your kids through college. Many American families I know do this. Is it some sort of national keeping-up-with-the-Joneses cult that an entire generation of Americans has been brainwashed into joining? Your kids will figure it out on their own and along the way they'll learn better money habits than their parents' generation.

Good luck.
Nick

[randymarsh]

With a $150,000 gross income, your kids won't get anything from the FAFSA other than loans regardless of whether your house is paid off. The FAFSA doesn't even ask about debts, actually.

[mstryin]

to "nktokyo" - Since we haven't previously paid close attention to our finances because "there was always enough", I don't have the solid grasp on our numbers yet that most other posters do.  I can tell you that yes, we had cable, we do have a crazy contract for phones and our grocery habit was a nutty too.  I am in the process of putting all of our receipts for the past year together and then I'll have a better idea of where it went so I can eliminate the superfluous.

I do know that Last year, my husband had multiple surgeries for skin cancer, I had surgery and both of us had a crown on teeth and daughter has issues - we have very good insurance, yet the co-pays still were over 8,000 for all of the procedures - and our insurance costs of 1,300 per month (yes, an area to really cut back).  Not whining - I just know that's where a good chunk of the money went! Hopefully this year will be better.

Inheritance questions are not out of bounds - but I do not expect much, if anything, from my parents or my in-laws. As for paying for college - if we will not get aid, there is no chance that we will be able to pay for college entirely.  Help, yes - but both will have to work on campus and during summers - my 16 year old already works all summer to help fund college savings. But, if I can help them graduate with fewer dollars in loans, I would like that.  I certainly do not want to take any loans to help them - and some schools will not allow a student to take more than 5K per year - with the "family" then making up any shortfalls - and they talk about parents loans....with husbands age, us taking loans is a non starter.  So I may just keep working and pay out of current earnings if we have to - while I search for a job that I would enjoy more than my current one.

to "the financial student"  - As for financial aid for college, is there a breaking point for aid? 30K, 50K? 100?  I have not filled out FAFSA, but I have done an "aid simulator" on the College Board website and it does ask about debt to income ratios....if it doesn't matter, I wonder why they do it?!  Not very helpful in the long run if they give misleading information!

[bogart]

I'm sorry to hear about the medical problems you've had to deal with (and/or are having to deal with).  I'm assuming your DH's insurance does not provide access to a group plan and that you are having to deal with individual coverage (or family coverage, but privately purchased), and I know those costs can really be high.  Like yours, my family has struggled with some of these kinds of costs (though we do have group plan access, with associated lower premiums), so I know they can add up quickly.  Don't have any particular advice on those, just wanted to sympathize.

As for financing education, you may find the overview on loans provide on this page helpful: http://www.finaid.org/loans/ .  I don't know the organization but at a quick glance, the info. looks accurate and useful.  It's important to remember that financial aid arrangements vary widely, particularly if your kids are considering private schools which may offer their own packages and have their own rules, so it's hard to say exactly what they will and won't qualify for without more information (and to some extent, even if we did have more information).

Given that your DH is late 50s, your best bet for all types of saving is probably to start by maxing out Roth IRAs ($5,500 for you and $6,500 for your DH since he's over 50).  Those are retirement savings, but you can take the principal out at any time for any reason without paying taxes or penalties, and at 59 & 1/2, he can take everything out whenever he wants for any reason with no taxes or penalties.  So they won't count against your kids' financial aid eligibility (they are your retirement savings) but much of what's in them can still be used to pay those costs if you choose to do so.  And, if you put the money somewhere safe (a bank account), a Roth IRA can double as an emergency fund, though of course you want to do everything you can to avoid actually tapping it.

Hope this helps.

[madage]

...
and at 59 & 1/2, he can take everything out whenever he wants for any reason with no taxes or penalties. 

That's only true if he's had a Roth IRA established for five years. See this portion of IRS publication 590 for details, including a nice flowchart. The contributions themselves, of course, can be removed at any time, just not the earnings without paying taxes and penalties.

[hybrid]

Mrstryin,

I'm in a similar boat as you, but reverse the genders and I am the younger of the two.  My goal is to get the wife retired in 3.5 years and for me to be out by age 60. Start here.  Make a simple spreadsheet of your monthly expenses.  Then ask yourself which of those is a need to have and which of those is a nice to have.

Your cable and phone bills, like mine, are ridiculous.  But you have to convince your cable watching, texting, talking, iPhoneing family that these are both luxuries and not necessities.  Twenty years ago no one would have dreamed of paying $2k a year to use the phone, and now it is considered routine.

Cut your eating out wayyyyy back.  Eat delicious food at home at a cheaper cost.

Continue to be realistic about your medical bills.  If your family suffers from poor health, so be it.  It's a real cost so don't assume that will go down over time.  Bonus to you if it does.

If any of your family is not in good health due to poor decisions (like smoking or weight), some soul-searching is in order.

Lastly and most importantly, set some goals.  Once you have determined what you want to do, sit down with mrtryin and map out a plan to get there.  If he has a pension, excellent, you can use that to plan with.  The 150K you are making now can go a looooong way toward a more comfortable and earlier, if not early, retirement.

In your shoes I would keep working, get the finances under control, and set out your roadmap.  As for the kids college, go in state public and I don't have an issue with helping them along with that.  Perhaps pick up half the expense and have them work while in college to pay the other half.  That way they have skin in the game and exit college ready to make their own stashes.

Good luck! 

[bogart]

That's only true if he's had a Roth IRA established for five years.

Oops, my bad.  Yes, of course.  Good catch, thanks. 

[KingMe]

Your situation is not dire at all...provided that defined benefit pension keeps paying. With your right of survivorship, you're going to be fine for a long time, too. However, if the pension is eliminated or cut substantially, you're going to have to make major changes.

I agree with the posters who questioned extra principal payments to the mortgage. Putting in extra principal of $500 won't pay off the mortgage for another 15 years or so. It doesn't seem like that's the best use $6000 per year now.

When your husband's pension payments increase 3% each year, save the increase. Don't let your spending increase by 3% as well.

Pay attention to health care reform in your state. You may be able to choose a plan that limits your out of pocket expenses better than your current plan.

Look into all the tax-preferred investments available and make automatic payments each month.

As for your kids' education, assuming the pension is stable, you'd be able to help them financially after they graduate if you wanted. For the 16 year old, you're not going to get that much of a tax benefit with a 529. For the 11 year old, it might make sense. But first see if should see how successful you are at reducing spending and investing in your future.

[mstryin]

Many, thanks!  Yes, it has occurred to me that assuming the pension stays (which it should since he's already pulling it - "the word" is that they may cancel only the 3% for current pensioners - the state has already changed benefits for new hires) we are in solid shape for retirement.  His pension fund is very well funded at 117% - but legislation and the state borrowing from one fund to leverage another could change it overnight.  So it's smart to have a contingency plan to make up any shortfalls that could be out of our control.

His medical insurance is covered for free - but we have to pay the 'family' portion of 1,300 per month.  At some point, in this journey to reduce, that may change - as it stands now, it will certainly change when he turns 65 - the moment he is eligible for medicare, we lose the insurance.  But then that $1,300 comes to us to use on private pay insurance -

While we have some health challenges, we are generally healthy - I'm a runner (well, jogger) and the kids are great - no one smokes  - hubby could use more activity, but he's working on it.  We rarely, 1 time a month, eat out (I take lunch to work most every day).  In the past I have been a sukka for Whole Foods - not anymore!!  that makes a big difference! so we should be able then to get decent insurance at a reasonable cost.

So what I'm hearing the most is that we should:  1.) stop spending so darn much! 2.) invest in tax preferred investments - we currently only have the traditional IRA - sounds like a good bet would be to start putting $$ into a Roth IRA 3.) put some into our youngest 529 - that way, when she hits college (hubby will be 63) we'll have a nice bit saved.

[SunshineGirl]

I would also look into your health care situation and see if it wouldn't be cheaper for the three of you to move to a high-deductible plan ($10K/year) with substantially lower monthly payments.