“I want to make sure I am doing the right thing,” she says. “It is important for me to start thinking now what impact my saving and investing will have on my children’s lives in the future.”
Put yourself first. Many of Milhouse’s money worries would be eased if she prioritized her financial needs above those of others. To that end we suggest:
- Reconsider savings strategy for children’s inheritance. Milhouse’s top financial priority should be to fund her retirement. But before her husband died the couple promised each other that they would set aside money for their children that could be used to buy a house or start a business. She has been depositing $30 a month into a savings account earmarked for each child over the past three years, with a current balance of about $1,440 per child. Danny Freeman, CEO and founder of Darda Wealth Management in Winston-Salem, North Carolina, says Milhouse should invest those savings into a stock mutual fund that gives her a rate of return of at least 6%. However, continuing to fulfill that promise while also saving for retirement presents Milhouse with a serious challenge. Instead, Milhouse should create an emergency savings account to cover at least six months of living expenses. The move will eliminate the need dip into her 401(k) again, which can cost additional charges in fees and interest rates, double taxation, and reduce the power of compounding interest from her retirement plan. Monies needed for unexpected medical bills, home repairs or financial dilemmas should be taken from an emergency fund instead of tapping into critical investments.
- Don’t become the family bailout fund. Saying no to family and friends can be tough, but if you cannot afford to give it, then don’t lend it. Keep control of your finances and make sure you have enough money to cover your own needs.
- Use 529 savings to pay off school loans. Milhouse should consider changing the beneficiary from William to herself and use a portion of that $32,000 in savings to pay off her $22,000 school loans. She may not have to worry so much about her children’s college expenses. While she contributed $4,000 toward Teshaun’s education, her oldest has received scholarships and her participation in the U.S. Air Force ROTC program should put the sophomore on solid footing when she graduates. Milhouse also believes Marcus is likely to get athletic scholarships when he is ready to attend college. If not, he can pursue loans to finance his education.
- Seek greater employment compensation. When she is no longer getting income from her husband’s social security benefits, Milhouse will not be able to maintain her current standard of living. Ideally, she needs a job that will give her a 30% to 50% increase in income (for a salary of $41,600 to $48,000) to cover basic needs and to save for retirement, suggests author Carla J. Cargle, founder of Genesis One Wealth Builders in Sugar Land, Texas. Her new college degree could increase her salary potential.
- Temporarily reduce 401(k) contribution. Milhouse currently is contributing $410 plus $378 in a loan repayment per pay period. That equals $1,576 a month that is going into her 401(k). Instead of contributions of $788 ($410 regular contribution and $378 loan payment) per pay period she should reduce the regular contribution to $250 per pay period which equals $500.00 per month. When the loan is paid back in another three-and-a-half years, she can begin maximizing her per pay period contribution.
- Use additional funds to reduce the principal. Milhouse should take an additional $300 a month and use it to pay down the principal on her mortgage so that she can eliminate private mortgage insurance (PMI) premiums. Her current mortgage is approximately $834 a month, including insurance and taxes. By adding $300, this will allow her to have about $800 per month going toward principal and interest.
- Refinance the mortgage. Since Milhouse doesn’t want to move to a smaller dwelling and needs the house as an asset, she should consider refinancing over the next five to seven years, depending on the interest rates. It is not feasible or possible for Milhouse to pay off the house in eight years. But Cargle cautions that she only refinance the balance due on the mortgage and not take out any additional money. Refinancing the mortgage could put Milhouse in a position where she is able to get a better rate and payment that she can afford when she is no longer collecting the survivor benefits.
- Pay down the car loan. Milhouse should put the $2,000 contest winnings into her savings but should consider using the money toward the car note, which should be paid off in the next three years. After that, the $200 monthly car payment can be applied to her cash reserve.
- Set portfolio goal for retirement. Based on her current level of savings, retiring comfortably at 62 is achievable, says Freeman. Her 401(k), annuity, and anticipated pension benefits are her core retirement assets. With this in mind, and using a 4% inflation rate, at age 62, she will probably need $62,333 or $5,194 per month. Assuming she gets a monthly Social Security benefit payment of about $1,553 at age 62, the portfolio needed to generate $3,641 gross per month ($5,194 – $1,533) is $728,000 to $1,040,000. The monthly amount she needs to sock away to meet this goal is $406 to $1,128 monthly, assuming she gets an 8% annual investment rate of return.
—Additional reporting by LaToya M. Smith