When I wrote this blog, my wife was retiring after 29 years of military service. The year leading up to this retirement has been stressful for us both; more so for me because I worry too much. As I prepared for my wife’s retirement ceremony and ultimately her last pay check, I felt a sense of ease as well as accomplishment.
One of the main reasons I started this blog with my friend and colleague is because of my own unique situation. For my wife and me, we both are serving in the military and we have both been serving since high school. I have two years left before I plan on retiring and we always knew she was going to retire this year. However, I stressed over these two dates because ultimately, I didn’t feel prepared.
I know there are hundreds of thousands of people out there that are in the same or worse shape. I know that they are hanging on to their job for dear life because if they retire, their pension won’t cover their bills. This was one of the issues that we were facing, however my wife planned much better than I did. Although we aren’t living on “easy street”, we are comfortable in the fact that our lifestyle is changing just slightly now that she is retiring. We may not be able to go on as many vacations and we certainly are not going to eat out as often, but we aren’t stressing about losing our house or going into bankruptcy.
We haven’t gotten to the place I want for my wife and I yet. We have two kids. One will be in college in two years and the other will follow the year after. We didn’t do the best planning, but we did have a plan. The key is we had a plan. Although it isn’t perfect and there are things I wish I did differently, we aren’t hanging on for dear life. I want to share what we did and also what I wish we did that would have gotten us further along.
First, when we purchased our first home, we never purchased another one. Furthermore, three years into home ownership, we refinanced with a better rate and adjusted the terms to 15 years. We then accelerated our mortgage payments to pay it off in 12 years. We had plenty of work to do to the house and we needed to take out a home equity loan, but we ensured we always had a minimum of 30% equity in the property beforehand.. We never took out equity to pay off bills while we had the mortgage.
Second, we only bought one new car every 7-8 years. That car was for my wife as she took the girls to most things. I always bought a used car and ensured the loan terms never exceeded 4 years. I also made efforts to pay it off early. However, this is one of the areas I wish I did differently, but I will get to that in a moment.
Third, leading up to my wife’s retirement, we paid down our debt. We have not completely gotten out of debt, but our ratio is the best it has been since we got married.
Fourth, we followed a path that would help us with our kid’s college tuition. I say help us, but in reality it helps them. I have always told my kids that they would need to figure out how they would pay for college. It would be unwise for my wife and I to go into deep financial debt while in retirement. They can afford it, we can’t. However, being members of the military, we were able to transfer our benefits to our kids. Therefore, a majority of their college expenses have been taken care of. Today I have a slightly different approach to this. I am now working on teaching my kids how to pay for college without going into serious debt.
With the exception of my wife’s new car, we didn’t make extremely large purchases within the last five years of my wife’s career. This was actually by luck, as we never planned it this way. We just decided that we would wait until one year after her retirement to evaluate our financial condition to see if we could do it. Again, it may have been a little lucky, but it was because we had a plan. Although not perfect, any plan is better than no plan.
Now I realize that not everyone is as fortunate as I am in terms of employer benefits. Even if your employer doesn’t provide such benefits, you can still plan for helping your children with educational expenses. My opinion is that my kids can afford a $26,000/year debt better than my wife and I can. My task is to teach them how to afford it. As I have blogged about in the past, I am learning to be a successful options trader and plan on teaching my kids those skills. Imagine your child at age 16 takes 70% of their wages from jobs they have and invests them in some type of account that earns them 3-5% per month. Here is how that looks:
| Income/Year | Savings | Return | Total |
| $4,800 | $3,360 | 3% | $3.460.80 |
| $4,900 | $3,430 | 3% | $6,789.72 |
| $5,000 | $3,499 | 3% | $10,289.16 |
| $5,100 | $3,570 | 3% | $13,859.16 |
This is an aggressive plan for your child, but the point I want to make is that you have to have a plan. Don’t get wrapped up with trying to figure out my numbers; figure out your own. If you have a son or daughter and they have any income coming in, teach them how to budget that income and save but don’t stop there. If you invest money and get a return, teach your child. If you don’t have any of those accounts, educate yourself and then educate your child. Our school system is great, but they aren’t teaching kids this stuff. It’s your job to prepare your kids for the real world; not the schools.
What I Wish I Did Better
Leading up to my wife’s retirement, these are the things I wish we have incorporated earlier:
- Set up our budget using her pension check one year before retirement
- Paid down more debt and consolidate our mortgage
- Saved more in our emergency fund
The first item would have set us on a better path for the next two items. One of our major flaws is consumer debt. My wife and I go through a cycle where we pay off all our consumer debt only to be right back at square one. If we had set up our budget to reflect her eventual pension check, we would have been more prepared. In essence, we would have lived in the present using projected income numbers as our budget. This would enable us to correct and plan for any bumps in the road. Furthermore, the difference between her pay and pension check is sizeable. If our budget worked, we would have saved $4,000 per month in the last year before her retirement.
When we refinanced our home way back in the beginning, we owed a very small amount when my wife was nearing retirement. However, I ran some calculations and decided to open a Home Equity loan to consolidate all debt. Remember that consumer debt? Well that was rolled into the new loan along with the old mortgage. This is contrary to what I talked about earlier, but our new loan with all our debt rolled into it is only 42% of the equity of our home. This fits our plan as we want to move from the Northeast to the South in two years. Even if the real estate market takes a plunge, the chances of our home value falling to our equity debt would really mean that life as we know it is coming to an end. When we sell our home in two years, if that is the best course of action, we will be moving south with a sizeable chunk of money and absolutely no debt. So, in all my worrying, if my wife and I stick to our plan, we will be debt free when we both reach the age of 50. I know there are some people who are debt free now, but they are a small part of the country. Census data demonstrates that most Americans are in debt. My plan was far from perfect, but I believe achieving this objective is a huge milestone. My only regret is that I didn’t learn this sooner. I hope you can learn from my mistakes and get to that milestone at an earlier age. This is not to say all debt is bad (James will be discussing this in a future post) but, when we move south we will not be getting taking on a mortgage. I want to be able to enjoy my retirement years and I think it’s best to enjoy them while you are still relatively young.
Remember the comment on the car? Well here is a new strategy that I was recently taught by my mentor. The plan is to buy a “new” car every three years with cash. I put new in quotes because I want to clarify this to mean new to you; not necessarily brand new from the factory.
First, unless you have $100,000 burning a hole in your pocket, you may not be driving a BMW or Mercedes. However, with this plan, there is a very good chance you will in the future. The first key is to research what car holds its value the best. Second, if you currently have a loan on your car, pay it off and save that monthly payment until the wheels fall off. Use that money to pay for expenses on your car, but throw in the towel once the expenses are more than the car is worth. For example, let suppose you have a current car loan for $300/month and you still have two years left on it. Aggressively pay down this debt and once it is paid off, save that $300/month for the next three to four years, the longer the better. Now with that chunk of money, find a car in that price range and buy it. Continue to save that $300 and if you can, add to it. Hold on to that car you just bought for at least four to five years. Sell it, take that money with the savings and buy another car. Rinse and repeat every three years. Now some folks may be poking holes in my plan, but just remember, it’s my plan. If you have a plan that is better for you, then do that. If it works better than mine, share it with as many people as you can. What you will find is that in the beginning you will be tweaking this plan to ultimately find that you are able to buy a $20,000 car with cash. However, don’t be afraid of taking out a loan equivalent to the amount of cash you have. Currently, in today’s economy, a $10,000 car loan with good credit will only cost you approximately $900 in four years. That’s just over $200 per year and if you learn how to make money with your current cash, that would be a better route.
Like I said in the beginning of this blog, our plan wasn’t perfect, but we had one. Success in any venture cannot be achieved without a plan. Things might not always go according to the plan. Don’t be afraid to tweak it to fit your current situation.
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Great advice about the college savings. When I found myself returning to college full time for a second degree at the age of 23, I did a nationwide search and looked for programs with low enough out of state tuition, and schools who would consider me in-state after a year. I found out it was more affordable for me to MOVE OUT on my own, out of state and be a full-time student rather than “save by living at home”. There are ways to make higher education more affordable, sometimes it takes a little more research than meets the eye.