This week we look at a woman that needs to dive into the deep end and sell her house ASAP!
The Situation
Jackie, 55, lives in Golden, in the house she built with her ex-husband and raised their family in together. Jackie and her husband divorced almost 10 years ago and her alimony, $6,000 per month, will end in 2018. With both of her sons grown and living out of the house, Jackie decided to go back to school and get her early education teaching degree as she always had a love for working with young children. She currently earns $40,000 per year but has realized with her monthly alimony payment ending soon she needs to make some changes, and fast!
To put herself through school she took out student loans that she will need to begin paying on in December. Her monthly payments will be $400 per month for the next 10 years. Her current home is valued at $600,000. With a monthly mortgage payment of $2,000, with five years left to pay, she has about $500,000 in equity. Jackie’s various bills add up to approximately $1,300 per month and she gets miles for the credit card she pays off monthly, which averages roughly $2,500 per month. Jackie’s retirement accounts include: a 401(k) with $10,514, two traditional IRAs with a combined value of $36,806, a Roth IRA account with $18,089.
Jackie also chose teaching as her career for the flexibility to move out of Colorado should she choose. Her youngest son is working on his doctorate at the University of Denver and has two years left. Jackie’s oldest moved to North Carolina with his wife and Jackie has contemplated moving to the East Coast to be closer to her future grand children once her younger son finishes school. Jackie knows there are some major changes and adjustments that need to happen and she wrote in to What’s The Plan to see if Pam could help her get off of the block. Her first statement to Pam was “I know I shouldn’t have kept this house, and I need to sell it, don’t I.”
The Recommendations
Jackie needs to get her house on the market now! (The time of this interview was late May.) I know how hard it can be to walk away from something that has sentimental value, but it is damaging her financial future and will be difficult to recover from if she doesn’t act quickly. I recommended she contact her Realtor friend immediately to list her lovely home that comes with a big liability: a swimming pool in the back yard! The time to sell a family style home is during the summer before kids are back in school. The market is hot for homes in Colorado and a pool is most attractive to buyers in the summer. It’s probably not necessary to invest too much money in renovations before listing, just throw 25 years of stuff in storage to be gone through later and act fast!
According to the Society of Actuaries, “Those who divorce after retirement report losing up to half of their assets or having to sell their home, either because it was part of their settlement or they could no longer afford it. Every retiree in the focus groups who divorced post-retirement reported a financial impact.”
Jackie is not alone. In 23 years of doing this work, I’ve seen her scenario too often. The spouse that leaves, leaves the other spouse with stuff to clean out, and an expensive albatross house around their neck. She shouldn’t dwell on this now — she can reflect on it all later. Jackie is a smart capable woman and she can do this!
If Jackie sells her house now and nets $500,000 of equity, she can rent an inexpensive apartment while she contemplates moving out of state or jumping back into Colorado home ownership. I recommend she keep half of the proceeds from the house in a bank savings account targeted to purchase a home in the next couple of years — $250,000 in any one bank account is the maximum FDIC-insured balance. The other half can be invested in a moderate allocation for the 10+ years she intends to work until retirement.
With the IRAs she has, and the money invested from the sale of her home, she’ll have enough assets to give her about $20,000 per year of income. Her former husband is obviously a big wage earner. She can claim half of his Social Security, which will give her about $20,000 per year in benefits at her full retirement age of 67. With a paid up place to live and about $3,000 per month after tax to spend, she’ll be able to live modestly, yet independently. Working with young children will keep her young, and if she works to age 70, it will be all the better.
Now is the time for Jackie to dive deep into the pool. If she follows the advice of Dory, the little blue tang, and just keeps swimming for the next 10 to 15 years, she can still win the race to retirement.
What’s your plan? To ask Pam what you should do, e-mail her at whatstheplan@consistentvalues.com. Names and identifying information are changed to protect confidentiality. What’s The Plan is not a substitute for dedicated financial advice.
