In many circumstances, unfortunately, pre-retirees think they’re on the right track to retire comfortably, with enough money to continue their current lifestyle and the financial freedom to do what they want. But they’re wrong. They don’t take into consideration their spending habits or financial commitments and they don’t follow the suggested steps created by a financial advisor that will make their retirement dream even possible. Instead, they face retirement stories of horror and complications.
Here’s an example:
A few years back, “Charles and Linda” were referred to us by their accountant. Charles had just retired a month earlier and moved to South Carolina from the Northeast. Their only child was living in South Carolina and they wanted to be close to him and their grandchild. Charles and Linda were both about to turn age 66.
The couple retired prior to seeking out financial advice. There was no clear understanding of their annual expenses, but they wanted to withdraw a very high amount from their savings and investments. While they were reluctant to share specifics of current and past spending, we asked how much their annual income had been over the last three years. After realizing their past level of high earnings during their working years, we knew that their spending was out of control.
Charles had a great career where he was earning more than $300,000 per year. His 401(k) plan was valued at $600,000. He was expecting a payout from his company of $400,000. But it actually ended up only being $280,000.
Too Much Debt in Retirement = A Nightmare
When Charles and Linda moved to South Carolina, they purchased a $400,000 house and had a $260,000 mortgage, along with $42,000 in credit card debt. They were also paying for their son’s $143,000 mortgage and $23,000 in student loans. The total monthly payments added up to more than $4,700.
The big elephant in the room was they were paying the student loans, mortgage payment and some other monthly expenses for their 32-year-old son. Our recommendation was to let their son assume his debt payments and not fund any more of his other expenses. But they would not waiver on this. Even after lengthy discussions, with me and their accountant advising them, they still could not let their son assume those monthly expenses.
Warning: Treating an adult child like a spoiled 10-year-old hurts everyone. It dampers the child’s ambition and hinders him or her from the path of independence and personal growth.
With covering their son’s expenses, their mortgage payment and their other high expenses, retirement will not be sustainable. They will run out of money!
Having a high income for many years and a low amount of savings, I knew that they had a spending problem. Before now, they did not have access to lump sums of money. They now have access to the 401(k) and the company payout.
People make decisions based on emotion, some more than others. With this, I knew that it was imperative for Charles and Linda to continue through retirement without a mortgage. If they did not, then they would likely go through the funds fast.
Global View’s Recommendations
We, along with their accountant, recommended the following steps:
- Pay off their credit card debt and use the remainder of Charles’ company payout to pay down the mortgage. This left a mortgage balance of $20,000.
- Let their son assume his mortgage payments and student loan payment. (This is essential for your adult children to continue to grow and mature. Teaching a child to assume responsibility for themselves is more effective than giving them resources or leaving a large financial legacy.)
Eliminating the debt would reduce expenses by $57,000 per year, plus the $2,000 or more per month that the couple was giving their son to cover other expenses.
Outcome After Two Years
Two years after meeting with us, they have spent all their non-retirement assets and $50,000 of their 401(k) assets. They are down to $450,000 in total assets and still have their mortgage. And they are still paying their son’s debt payments and expenses. I guess they will have to run out of money to see that this level of spending can’t continue. Charles and Linda will be out of money in just a few years. They will also still have a hefty mortgage.
Don’t Be ‘Charles and Linda’
Action: Face the realities in your life! Before it’s too late, seek financial advice from a fee-only financial advisor and put a plan in place.
Hope is not a strategy!
Unfortunately, there are a lot of people like Charles and Linda. But they don’t have to be.
We work with people who move to South Carolina quite a bit, and we can help set up a retirement that is much different than this one – retirement stories without the horror! Contact us to see how we can help.
