Thirty-one-year-old Curtis Hoosier of Decatur, Georgia, believes he has outgrown his 3-bedroom, 2.5-bath home that he bought 10 years ago. Earning an annual salary of $82,000 as salesperson for a telecommunications firm, Hoosier feels he can afford a new mortgage on a 4-bedroom home while still maintaining his 3-bedroom house as a rental property. His current mortgage is $795 a month, and he is anticipating he can rent the home for $900 to $1,100 a month. Hoosier is also looking to save $1 million for retirement at 65, pay off his student loans in the next five years, and leave a nest egg for his family in the event of his untimely death.
“I have a very close family. I have eight nieces and one nephew. So if my mom and three sisters and all the children come down [from his hometown of Indianapolis], some of them have to stay in a hotel. So I want a place that is large enough for everyone,†explains Hoosier of his plans for an upgrade.
The problem, however, with keeping his current home as a rental property is that he pays a high interest rate of 6.25% and the value of the property is $47,700, which is underwater, considering the $85,000 due on the mortgage.
Having rental income is part of Hoosier’s long-term retirement plans. “I’d like to have two or more rental properties by the time I retire and still live the same lifestyle I have now,†says the globetrotter, who has traveled to Brazil, South Africa, and Germany, among other locales.
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To maintain his lifestyle, Hoosier estimates he would need about $1 million in a retirement account to supplement a monthly income of $2,000. He has already saved $80,000 toward that goal by contributing 4% of his salary regularly and making extra contributions when he receives his monthly commission and a $3,000 quarterly bonus. Hoosier also has an additional $20,000 in a traditional savings account, putting aside whatever money is left over after his monthly expenses.
Hoosier’s other short-term goals are to pay off his $45,000 student loan in five years. “I don’t want to be paying these student loans until I am 50 or 60 years old. So the sooner I pay them off, the better,†says Hoosier, who also has a $10,000 car balance and $2,000 in credit card balances.
Hoosier is also stashing $2,200 per year into a whole life policy that will pay out a face value of $200,000 to his beneficiary, which is currently designated as his mom.
The Advice
To keep Hoosier’s wealth-building goals on track and to ensure they are not derailed by his ambitious plan to meet his family needs, black enterprise and Ted Parrish, principal and director of investments at Henssler Financial in Kennesaw, Georgia, recommend Hoosier take the following corrective actions:
– Put second home on the back burner. Hoosier shouldn’t rush into purchasing a new home just to accommodate visiting family. Instead, he should wait at least two years before purchasing a new primary residence to allow for a housing market correction. “Most likely, housing prices will remain affordable and allow Hoosier to make a solid investment in a new primary home over the next couple of years, after he has refinanced his current property,†says Parrish. Waiting will also give Hoosier time to save for a 20% down payment on a new property.
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– Refinance current mortgage. Parrish suggests that Hoosier seek a lower interest rate through the Home Affordable Refinance Program (HARP). “It is essential that he refinances and reap the savings,†says Parrish. Although Hoosier’s home is underwater, he could still qualify for the HARP program, which would adjust his rate to the market rate of around 4%, versus the 6.25% he pays now. If Hoosier sees his current home as a potential investment property in the long term, he should take advantage of this interest rate reduction now so that he can increase his rental profit for the future.
– Take your time paying student loans.
“I would suggest not rushing to pay off this debt. Tax-deductible debt with low interest rates can be considered ‘good debt,’†says Parrish. “Hoosier can allocate the money not used to pay off this debt [quicker] toward his retirement savings.â€Â Hoosier is currently paying $216 a month on his federal student loans. Parrish suggests that he aim to pay off the loan over the next 10 years, increasing his monthly payments as his income allows.– Pay off other debts. Hoosier should use the $2,000 black enterprise winnings toward his car loan or credit cards, and use half of his current savings to pay off the total balances on those debts. “If his credit card debt of $2,000 is an ongoing balance that he carries, then he should pay it off out of his savings account,†advises Parrish. “And, assuming the interest rate he pays on his car loan is higher than what he earns on his savings account, he should also pay it off out of his savings account.†Hoosier currently pays $350 per month on his car note. “He can plow that to the home he’s looking to buy in a few years,†advocates Parrish.
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– Switch to term insurance … if you must have insurance. “He really doesn’t need insurance,†says Parrish. “Insurance is not an investment product; insurance is to hedge a risk.†However, if Hoosier insists on having it, Parrish recommends he switches to term, which he estimates to cost as little as $300 per year for someone Hoosier’s age. That would be possibly $1,900 less than the $2,200 that Hoosier pays annually now. Since Hoosier’s policy is for an older relative, a 30- or 40-year term is recommended. If Hoosier passes during this period, his mom would still get a $200,000 face value, same as his current whole life policy.
– Increase retirement contributions. Hoosier’s employer matches up to 6% and he has only been contributing 4%. Hypothetically, not contributing that extra 2% over a three-year period could accumulate to a loss of approximately $278,550 over a 30-year period, estimates Parrish. “In order to achieve his goal, he should increase his 401(k) deferral to 6.5%,†says Parrish, noting that $1 million in today’s dollars, adjusted for inflation, will only be worth $250,000 in 35 years. Parrish suggests that Hoosier have 90% of his investments spread across large-, mid- and small-cap equities, with the remaining 10% in alternatives such as real estate and commodities. “I think he should continue to practice delayed gratification, invest in growth whenever possible, and continue to have a long-term focus when investing equities,†Parrish says.