Even the best laid plans can go terribly awry when one must deal with the unexpected. At 44, Rodd Herbert says he has done so much right, such as living a debt-free life, faithfully saving for retirement, successfully flipping real estate, and calling a million-dollar house home. But now everything could be in jeopardy.
“When you’re 40 and the doctor tells you that you may not be able to work to retirement age, everything changes,†says Herbert, who lives in Palos Verdes Estates in Southern California. “I didn’t plan on health issues that could possibly wipe out everything.â€
For the last 16 years, Herbert has been plagued with back troubles as a result of degenerative disc disease. After three surgeries, the prognosis is not good. “In the next seven or eight years it may be that I can barely walk or work,†says Herbert, of his condition.
Herbert, a national performance excellence manager for an automotive finance company, says his employer spent $10,000 renovating his office to accommodate his limitations. Adjustments were made to his keyboard so that he is no longer straining or pulling his arms away from his body. And his computer screen was changed so that it would be at eye level. The height of his desk was increased and he was given a specially designed desk chair. Herbert has coped with these changes because his job is such an important part of his life. “My friends wonder why I don’t take a lot of vacations. I love what I do.†Herbert says his doctor suggested he go into real estate if he ever had to leave his job. He has sold real estate in the past and could work out of his home and go at his own pace, and not have to be at desk for hours at a time.
The thought of not working has been a financially and emotionally devastating experience. “I do not want to give up my house,†says Herbert, who owes more than $800,000 on the three-bedroom, three-bathroom house he purchased in 2004.
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Herbert is contemplating what may be inevitable. Right now, all medical expenses are covered through his employer-provided health insurance. He has disability insurance that will pay him about 70% of his nearly $200,000 annual salary. He also has a $350,000 life insurance policy through his company, one that allows him to keep his premium should he ever leave. As a single man with no children, he says he isn’t concerned about losing coverage. In addition to his disability insurance, he will have to rely on his personal savings and disability from the government (Social Security) for his income.
His priority is staying in his home, at least until he is disabled. He wants to pay it off, or come as close to doing so within the next seven to 10 years. Then he plans to sell the property and relocate to a less expensive location such as Texas or Florida and use the proceeds to pay cash for a new home.
He’s searching for a game plan to achieve that goal. He’s been chipping away at his mortgage, making one extra payment a year–but much more will be required.
Although he has no debt outside his mortgage, and has almost $200,000 saved in IRA, money market, and 401(k) accounts, he has a fetish for the fabulous.
“I’ve gone to the store to buy a pair of jeans, but I spend $700 on three pairs of jeans and two shirts,†says Herbert, who thinks nothing of plunking down $800 or $900 for a designer jacket, or $600 for a pair of sunglasses. His greatest obsession is briefcases. “I don’t care about the price. I buy a briefcase every 60 days, and then I have to get shoes and belts,†says Herbert. “I realize that money could be paying on the principle. But that doesn’t give me instant gratification, which I need,†he says honestly.
With the clock ticking, he’s thinking about his later years. “Some people have skydiving on their bucket list. I want to sit back and look at the ocean. I don’t want to owe anybody. I want my home to be paid for.â€
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The Advice
To help Herbert prepare for the possibility of disability, black enterprise and Katrina Everett, certified financial planner and vice president with Wells Fargo Advisors, came up with a plan to help him reach his goals.
- Get real about the house: While Herbert is set on staying put in his home for now, Everett thinks otherwise. “It’s hard to justify putting almost $5,000 a month toward a mortgage when you have health issues. A mortgage of more than $800,000 is a lot of mortgage for someone at his income level. I recommend he sell now and live a modest lifestyle and accumulate extra savings for medical expenses,†says Everett. “He s
ays he wants to live life, to entertain his family and friends in his home. For him, it’s about living, not saving. It takes cash to service that house–I wouldn’t want him to be house rich and cash poor,†she adds. Herbert has quite a bit of equity in his home, unlike most Americans right now. He could possibly sell his home and walk away with some money in his pocket. He may have to consider looking into assisted living or leaning on family in the event his condition becomes worse. But assisted-living facilities are very pricey and can easily exhaust some or all of his savings. That is why it is very important that he saves as much as possible in his working years, adds Everett.– Stop spending lavishly and save more: Everett says Herbert is counting on his house to be his retirement pot of gold, but the truth is, she says, he could easily be a millionaire if he controlled his spending. He takes home $10,000 a month after taxes. “He has spending problems. He has to work on his discipline. He should automate his savings, much like his 401(k). This will force him to save,†says Everett, who says Herbert needs a financial planner to hold him accountable. “He has to realize that he is spending money on things that depreciate.†Given his health, there is understandably temptation to live for today because who knows how illness may impact tomorrow. But medical advances could change the picture in his favor. He should still think long term, says Everett.
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Ideally, he should save one-third of his income, between his IRA, 401(k) and other savings. “That $2,000 and more a month he spends willy-nilly should be put in a brokerage account or a short duration bond fund,†says Everett. He should continue to max out his 401(k) every year, she suggests. He is currently putting away $16,500, plus his company matches 6% of his contributions. Everett recommends he save a minimum of one year’s expenses in an emergency fund. Herbert should also commit to putting an additional $1,000 per month toward his mortgage if he decides to stay in the home and another $500 to $1,200 per month in a brokerage account. She also says he should have $500 to $1,000 automatically deducted from his paycheck and put into a brokerage account for long-term savings. He should put the $2,000 Financial Fitness Contest winnings in his emergency fund, or, if he qualifies, contribute to a Roth IRA or non-deductible traditional IRA.
– Expect the unexpected: “He has a sense of comfort about his job. But we’ve learned the last few years that nothing is promised. He could lose his job at any time. He won’t be able to eat that Versace jacket,†says Everett soberly. While Herbert has a heads up about what may be down the road, not everyone gets advanced warning. Many people don’t think they need life or disability insurance, but they do. You have to ask yourself what will happen to your family if you can’t work and you can’t pay the mortgage. Herbert doesn’t think he needs life insurance because he is single, but life insurance can make sense even for singles. It can be a tool to leave a tax-free legacy to relatives or charity. You can also build on an existing policy once you’re married instead of initiating it when you’re older and it is costlier. Everett advocates buying long-term care insurance because health problems can be the juggernaut that drains assets in your golden years. It’s less expensive to get life and long-term care insurance when you’re young and healthy. Long-term care insurance would be ideal for Herbert, but unfortunately, due to his existing health problems, most insurers will not insure him for “long-term care,†and if they did, it would be very expensive. He should hold on to his job so he at least keeps disability coverage and should check into getting a supplemental disability policy beyond what he has at work. People should consider supplementing employer provided coverage with a policy of their own. “If Rodd loses his job, that disability policy through work pays nothing,†points out Everett. He should qualify for Social Security Income that will net him about $2,300 a month, not nearly enough by itself.
- Create a will: “I have no kids. When I’m gone, I’m gone. The money that’s left will be for my mother, my family,†says Herbert. But wishes are best put in writing. Quite simply, says Everett, “Everyone needs a will.†He should have an attorney prepare the medical directives. A well-conceived estate plan will ensure that his heirs/family will enjoy the security of his assets. In addition, creating an estate plan with a trust can be an effective way to avoid probate, to pass his assets on as he intended, and to keep his financial matters private. BE