I am kicking off a new series called “Grabbing Your Own Slice”. These will be stories of people who are in various stages of their own financial independence journey . Hearing peoples stories of how they got to where they are today has been inspirational not to mention helpful in learning and knowing that we are not alone. My hope is that you find the same.
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This week, we have a guest and personal friend who is sharing her story and financial snapshot. A special thank you to Ann who is braver than she believes, stronger than she seems and smarter than she thinks. 🙂
Ann is 48, has no kids and recently divorced. In a win-win move, i.e. save money and help her parents out she recently moved back in with them. Then the unthinkable happened, a month after filing divorce papers she lost her job.
Now, a few short months later she is ready to get back on track and get her financial life to a better place.
First the Good News
Moving in with Parents
I know what your thinking.. how is moving back in with your parents a good thing??? No question it can be tough moving back in, especially after living on your own for so many years. But in this case, her parents are older and with health issues. It makes the most sense for her to live with them and help out while saving money. This is a long term win-win with some short term adjustment.
She also had a prenuptial agreement in place before getting married. No one ever wants to think that blissful married life will end but for 51% of Americans is does. A prenup just makes sure that in the event you find yourself getting a divorce, there is no fighting – everything is outlined while things are good and all are clear minded.
Think of it as insurance. We all purchase insurance and hope we never need it.
Extra bonus points to Ann and her ex for keeping things civil and friendly. Divorces under the best of circumstances can be difficult, no need to add to that.
Invested in 401k
Ann has continually invested in her company 401k to get the matching. This is great because we should never leave free money on the table – so says Warren Buffet and me! ha!
She has also maintained an emergency fund to the tune of $80,000. This is awesome!!!
Lastly, before getting married, Ann purchased and lived in a condo, purchase price $155,000. After moving in with her husband she rented the condo out and still owns it today. Cashflow positive and today the condo is valued at $200,000!!! woo-hoo!
Todays Living Expenses
Since moving in with her parents she has been able to pair down her living expenses to under $1,000 per month. This does not include the rental property which the rent covers the mortgage, insurance, taxes and HOA with about $200/month left over. Cashflow positive! 😉
Let's talk Net Worth
Today her net worth is almost $360,000. While she doesn't have kids, Ann does have her aging parents that she wants to take care of when the time comes. To be able to do that, she needs to make some simple changes.
Ann has a lot going for her but this is not enough to retire on for one person let alone one person plus 2 parents.
The list of Ann's action items for a first round is short but would make big steps forward in getting her back on this financial independence journey. (I am going to skip the part about finding a new job because that she already knows and is job hunting as well as looking at Certificate classes to add to her resume. She doesn't need me for that! 🙂 )
What's My Number?
In truth, none of us know how much we will need in retirement but based on our current spending and thinking about what retirement would look like, would take us a long way in determining how much we would need.
Personally, I love using Wes Moss' calculation from his book, You Can Retire Sooner Than You Think, as a rule of thumb to shoot for. He calls it the $1,000 Bucks a Month rule which states,
[bctt tweet=”“For every 1,000 bucks per month you want to have at your disposal in retirement, you need to have $240,000 saved.”” username=”PieLadyFI”]
No fuss, no muss. Easy rule to apply. Basically the more we control our spending, the less we need to live on.
I am no financial advisor, nor do I play one at home. 🙂 It is important to have someone who will be your partner on this journey on the investing side. They need to understand and support your goals but more importantly understand your concerns and needs as well. Talking to someone at Fidelity, since Ann already has an account there, is a great starting point. The fees are low and the financial advisors are salaried.
No question, there is no need to have multiple 401k accounts. We didn't even get to the conversation about fees and *why* are these companies so generous to hold onto your 401k and “manage” the account. Ann has no information on how the accounts did year over year or how much she paid in fees.
No question, $80,000 in a savings account is great especially since we have an emergency – job loss. Its also awesome that the only debt she has is the condo mortgage.
But an interest rate of 0.01% is highway robbery. Especially when she can easily move that money to a 2% money market account today.
Depending on her risk level, I also suggested she think about splitting that money. Add up her and her parents monthly expenses, take that amount and times it by 3-6 months (based on her comfort/risk tolerance). Put that in a Money Market emergency fund and the rest in an index fund.
I am the first one to say that a condo is a terrible investment. Condos rarely appreciate in value, plus there are HOA fees, which Ann is paying $225/month. The mortgage balance is about $100,000 on a 30-year fixed loan at 4.75%, paying $900/month. The good news is that is covers taxes and insurance.
While 4.75% isn't terrible, it might be a good time to shop around and see if a) its worth selling and invest that money elsewhere or b) refinance the loan to a 10- or 15 year loan to get rid of it or c) accelerate payments by paying down the principle.
This is an area I know little about. I advised her to talk to her parents about getting life insurance, term, if possible. Her parents have no savings and still owe about $35k on their mortgage. They live on social security and her dad's pension. If her dad passes first her mom would be in serious financial ruin.
A term life insurance policy for $200k could pay off both mortgages and have a little left over for emergencies. But a better policy would be one that would cover both mortgages and replace his social security and pension incomes. These are hard discussions to have but very needed.
She should also sit down with her parents and talk about social security and options if her dad passes first. Her mom should be able to claim his social security, which would be more than what she currently collects.
Of all the proactive things to do, this will be the hardest.
Once Ann has employment, its a matter of understanding the company benefits package, opening her 401k and investing money appropriately.
It might also be to her benefit to continue to max out her ROTH depending on how long she plans on working. Roth IRAs are a great way to balance taxes during retirement as withdrawals from a Roth are tax free vs a 401k withdrawal that would be taxed.
And the best for last. Tracking her expenses and focusing on spending where she can stretch her dollars the most will be a huge help. I sent her my Pie Lady FI's Home Budget TEMPLATE.
The first round list of action items will do wonders for her in the coming years. Once she has this part done and gets a new job, she can work on the next piece, determining when she would like to retire and what would that look like. From there we can make a plan to achieve it.
Reaching financial independence is not difficult but it does require time and a commitment to doing right for yourself and your family. I always tell my own kids we can afford anything, we just need to determine what the most important things are.
Each one of us has a “pie” that is only so big… how do you want to slice your pie?
If you are interested in going through a similar financial analysis as Ann did, please feel free to reach out at GrabYourSlice@gmail.com.