But I am still worried about retirement. One son still has 3 or 4 years left in college, which we will pay via the $1,000 per paycheck savings. After college is paid for, that $1,000 saving per paycheck will go into some type of investment. At that time I will be around six years from retirement.
We want to have a 'retirement' home in the $350,000 range but I am hesitant to take on any debt. Should we plan on staying put so that we have enough for retirement— or can we afford to take on the cost of a new home and still plan on a healthy retirement? —B.E., Sachse, TX
A. It's really confusing to think about retirement while you are in the middle of paying for college. So let's take a step back and isolate the important numbers.
First, while your combined income is now $185,000 a year, you are saving a great deal of it, paying employment taxes, and paying an income tax bill that will be smaller when you actually retire. My bet is that your actual consumption is well under $100,000 a year. It will be lower still when you become "empty nesters." This is important because the amount of money you need in retirement depends on what it will cost to sustain you and your wife— not you, your wife and two boys.
Second, your total financial assets are about $825,000 and you appear ready to add the maximum every year until you retire. So you now have at least 8 years of retirement spending banked. If the historic averages for investment returns would come back to life, that $825,000 could double by the time you retire, providing a lifetime spending of about $64,000 a year, possibly more. (This assumes a 4 percent annual withdrawal from $1.6 million.)
Third, your combined Social Security benefits should total about $45,000 by full retirement age, bringing your pre-tax retirement income to about $109,000. You'll need to do the fine pencil work, but you're a lot closer to being on track for retirement than most people even with a bigger house and a mortgage.
The house decision is all about what does most for you. The more expensive house is likely to have higher taxes and insurance costs, but could otherwise cost little more than your current house. For example, you could be supporting a smaller, but more expensive house with lower utility bills. The big cost would be taking on new mortgage mortgage debt. If you borrowed $200,000 at 3.75 percent for 30 years it would cost you about $926 a month. Bottom line: Go for it. If it is very important to you, you can make it happen.
Q. As a disabled and unemployed person, I receive about $1,250 a month from VA Disability and Social Security. I probably would be advised not to invest, right? I have an additional $75 monthly going to an ING Direct savings account. What do you suggest? —S.W., Wenatchee, WA
A. I think it is important for people with low incomes— as with all people— to have some amount of money as a cash reserve. Since that reserve would be small, the big question isn't whether it is invested but whether it exists and is liquid.
Having ready cash is how someone with a low income can make his or her dollars go further. It does two things for you. First, it allows you to take advantage of resale shops and other opportunities for very low cost purchases. Second, not having access to ready cash can also be very expensive, witness the high cost of sending cash by Western Union and other cash transfer services, the cost of car title loans, etc. In other words, the most important thing isn’t so much the return on your savings but the expenses your savings will save you from.
Filed Under: Mortgage