In 1996 when Patricia King’s husband, don retired from the Army, she says they didn’t look at the big picture–and paid a steep price. “We didn’t understand the full impact that retirement would have on his finances when he got out. We kept spending as we always had. We made big mistakes. We were not prepared for his retirement,†says Patricia.
Don went back to work the same year he retired. Now they’re refusing to let history repeat itself. In the next three years, Don, who is 63, would like to retire from his job as a Department of Defense contractor. “We want to get it right this time,†says Don.
Their caution is understandable. Nearly 20 years ago, they lost their home to foreclosure. At the time, Patricia was an emotional shopper who could not control her spending. But the Rineyville, Kentucky, couple took money management classes at their church, and Patricia eventually weaned herself of her bad habit of using retail therapy. “We didn’t want debt to be a way of life,†she says.
Today, while they have more than $11,000 in credit card debt, they have a strategy. “We have a six-, 12-, and 18-month plan, going from lowest to highest interest rate and paying beyond the minimum, so that in six months we can pay off one, and then take what we were paying for that one and apply it to the next one for the next 12 months and so on,†she explains. Much of this debt is travel expenses, as well as some help they gave one of their three grown children to help furnish an apartment. Mostly, though, they tap their credit cards sparingly.
In addition to credit card debt, the Kings have about $18,000 in student loan debt, $199,000 on their mortgage, and $22,000 on their car loan. Their mortgage payment is $1,076 and they pay an extra $100 monthly. Their car payment is $546 and they pay $50 extra monthly. “We want to be debt free in two years and finished with our mortgage in 15,†says Patricia, who is the postmaster for the U.S. post office in Sonora, Kentucky, and officer in charge of the U.S. post office in Radcliff. They’re aggressive with debt because the goal is to reduce bills as much as they can before Don retires. At 50, Patricia doesn’t expect to exit the workforce for another 15 years.
Ideally, Don would like to retire fully in three years, but he is open to working part time. However, the couple still have yet to take a critical step: calculating the income they will need in retirement. “One of my primary concerns after both of us retire is affordable healthcare,†Don says. They are wondering what the best approach is for paying for long-term care.
They also believe that real estate investing will offer an option to develop an income stream when Don retires. Patricia has her broker’s license and they would like to purchase their first rental property sometime this year. “I would like us to buy about seven properties, though we don’t want to over-leverage.â€
(Continued on next page)
Another big motivator for retiring right is that the Kings also seek to generate multigenerational wealth, aspiring to leave an inheritance to their children, Ashley, Jeremy, and Danitra, and their grandkids.
The Advice
Black Enterprise and Lee Baker, a certified financial planner with Apex Financial Services in Tucker, Georgia, assessed the Kings’ readiness for retirement.
Do the math. While in retirement, Don will have “guaranteed†income from pensions, military income, and Social Security of at least $4,000 a month, says Baker. He says the Kings need to figure out how much income they will actually need in retirement. There are numerous calculators online such as AARP.org, FINRA, and ChoosetoSave.org, where they can get started.
Patricia will continue working for at least the first decade of Don’s retirement and she will have a pension when she retires. Age does matter, says Baker, particularly when it comes time for Don to choose his pension payout option. Because Patricia is 13 years younger than Don, he should strongly consider the benefit of a joint and survivor option. Upon his death it continues to pay income to his beneficiary.
Patricia should continue contributing the maximum to her 401(k) and stay committed to saving in the IRA and other accounts. She is contributing 10% at work and there is a 6% match in addition to this. Most of
this is in the U.S. government’s “G†fund. Assuming that it performs as expected, the fund will outpace inflation. Baker suggests that any additional funds be invested in a non-retirement account. “As crazy as it sounds, they only need to do what they are currently doing. Even when they are both retired, they will have more than enough ‘guaranteed’ income. “If you add up both pensions, Social Security benefits, and military benefits, they will have close to $7,000 in monthly income,†Baker says. According to Patricia, this will be more than enough for their living expenses of $4,000 a month.Eliminate debt. They are smartly paying extra monthly on their mortgage and car loan. Baker recommends they apply the $2,000 contest winnings toward credit card debt to bring it down to $9,000 and in turn pay it off over the next 12 months.
“It’s important that they stay committed to their pledge to be debt free. “The biggest thing that could blow up their plans is to return to the old habits that got them into a trouble a decade ago,†Baker says.
(Continued on next page)
Consider long-term care insurance. “Stuff happens,†says Baker. “I don’t think they will be in a position
to adequately self-insure. As a result they should look into getting long-term care coverage.†If either or both of them need long-term care, the cost could be a huge retirement disruptor. Long-term care insurance provides an option that prevents them from depleting their assets. According to Genworth Financial, the average cost for a private room in a nursing home is $222 per day and $200 for a semi-private room. In Rineyville, a one-year stay in a nursing home with a private room currently costs about $68,000.Take the entrepreneurial leap. Patricia wants to open a real estate brokerage seven years before she retires. “This is an area where Patricia has experience. In spite of what we have seen in the last few years, there is an opportunity for capital appreciation and income generation. I think her goal of acquiring seven properties over the next three to five years is realistic,†says Baker. However, “there is always the possibility that they buy property that falls in value or can’t generate net positive cash flow.†Baker says, “Patricia should allocate the $1,500 they have left over at the end of each month toward savings to cover emergency needs first and then as a source of capital for their business ventures.â€
Leave a legacy. “I think they should consider instruments to include a trust and/or family partnerships,†says Baker. “If they follow through with their plans to have at least two businesses, this would make a lot of sense to explore.†Based on their current situation, they don’t need to do any additional saving for the purposes of a legacy. They also have life insurance in place. Overall, says Baker, from foreclosure to where they are today, “they are in a wonderful position.â€