Help Needed

[jwthornhill]

"..And if the blind lead the blind, both shall fall into the ditch." Matthew 15:14

That's what came to my mind this Thanksgiving when my brother-in-law and his wife asked us for advice regarding getting his finances in order. Not only because, they're almost ten years older than us but also because, I know that I'm still trying to figure this thing out myself.

I don't know what prompted him to ask but, I told him that I'm no expert and didn't feel qualified to give him any advice so, I gave him our copy of Dave Ramsey's book, "The Total Money Makeover". And, before they left that evening we had reviewed the "Baby Steps" and discussed some minor issues regarding budgeting, their expenses and debts.

I mentioned to them how much help we've gotten from the blog community on online forums. I told them that I would post their details for help.

So, with their permission here are more details:

My brother-in-law works for the dept. of recreation for a large city here in Michigan and he also has a janitorial business he does in the evening. His wife is a secretary. They have a combined household income of around $56k. They have five children with only one still living at home, a 15yrs. old. son.

We only started talking about the Total Money Makeover this Thanksgiving so they haven't created their first budget but, we were able to create a very basic rough draft of their debts.

Mortgage balance: $88k ($1277./mo.)
Student Loan........: $70k (590./mo.)
HELOC..................: $25k (277./mo.)
CC VISA................: $5k ($55./mo.)
Sears......................: $3k ($32./mo.)
Home Depot.........: $2k ($29./mo.)

After regular expenses they say that they suspect to have an extra $300 to $400 that they could add to snowballing their debts.

The are both in their mid 50's and have no retirement savings.

Their Concern:

Since their student loan debt is so large could they defer the snowballing of their student loan until after they've:

1. Concentration on paying off their smaller debts
2. Accumulated a 3 to 6 month Emergency Fund
3. Begin Retirement savings immediately

or should they

1. Hold off on retirement saving until they have paid off ALL of their debts
2. And, accumulated a 3 to 6 month Emergency Fund


The concern is that by the time their debts plus the student loan paid off they'll be well into their 60's still with no retirement savings!

Any response would be greatly appreciated.

WNTBDF

[Scanner]

I think their age may be a factor here. What is it? If they are "10 years older than us", where does that put them? Why the student loans? Did they go to college late or is that from their kids?

Most of the time I am a "retire the debt" kind of a guy.

But in this case, since time is running out on them they may want to start immediately saving for retirement.

The only caveat I would add is to retire the consumer debt first with snowballing and then do a combo of debt reduction/retirement saving after that.

EDIT: Whoops - they are mid 50's - see that now.

My plan:

1. Retire consumer debt.
2. Start saving for retirement
3. Retire student loan debt
4. Retire HELOC
5. Retire mortgage

My prognosis is poor for them though, starting this late and with that kind of relative low income.

[Broken Arrow]

Unfortunately, regardless of what they do, they will most likely have to get comfortable with the idea of retiring late.

Can they somehow downgrade their house?

What are the interest rates on those loans?

Any unnecessary assets they can liquidate?

Some may not agree with me on this, but I think it's worth considering paying down the Visa card first. It's small enough to knock out early, and that will not only boost their morale, but the card can double as an ad hoc emergency fund.

Then, I'd probably split that $300-400 a month between snowballing the consumer debts as well as funding an IRA. Once the consumer debts are out of the way, then I would focus on the HELOC, which can also double as additional ad hoc emergency fund. Then I would consider tackling the mortgage after that.

In this case, I would probably worry about student loans last if only because it's one of the easiest loans to work with, the interest is tax deductible, and unlike the mortgage, at least they can't foreclose the house if they miss some payments. I would talk to their student loan lenders and see if they can't offer any kind of hardship deferment, forbearance, or even lower the monthly minimum.

Last but not least, I would ask if there's any way for them to "tighten their belts" and lower their living expenses. $400 per month (is it correct that this is a monthly amount?) for even 15 years is only $72,000. This aspect could make the biggest difference in their financial life as it not only increases their war funds against debt, but also will help keep their overall cost down to a more affordable level, well after retirement.

Just some food for thought. Again, whatever they decide, I would make sure they understand that they may have to retire late....

[jwthornhill]

I think their age may be a factor here. What is it? If they are "10 years older than us", where does that put them? Why the student loans? Did they go to college late or is that from their kids?

They are in their mid 50's.

They have all the student loans because, when his wife was early forties she tried to return to college and go to medical school to persue a dream of becoming a doctor!?? (I know I said the same thing)

[jwthornhill]

Unfortunately, regardless of what they do, they will most likely have to get comfortable with the idea of retiring late.

Can they somehow downgrade their house?

What are the interest rates on those loans?

Any unnecessary assets they can liquidate?

They are current considering selling it. But, here in Michigan the market it so bad that two realtors have already told them that they should wait another year or two.

I'm not sure what the interest rates are but, I give them a call to find out.

We talked about that and unfortunately it doesn't look like it. They both drive older paid for cars and they don't own any stocks, etc.

[jwthornhill]

Thank you very much for all of your comments and advice I will be printing them out and passing them along to them.

[Tree0164]

I think you did the right thing in giving them Dave Ramsey's book. I would focus first on Sears and Home depot credit cards. Those tend to have the higher interest rates.

I would encourage them to follow the baby steps-it works. Where they are older, they should be fairly aggressive (or gazelle as Dave followers call it). Can either of them get a second job? Or work overtime to get the snowball higher.

[Scanner]

I shouldn't have said my prognosis is poor - let me upgrade it to fair.

As another poster noted, they are really going to have to change their habits and changing habits in mid-50's is difficult. If they can somehow live frugally and earn some extra income, I think it's doable to have $100,000 to $200,000 in retirement by age 65, even more.

The net worth you posted I think reflects a relative value system of living on the margin.

If Dave Ramsey or whomever can inspire your friends to change it around, I wish them all the luck in the world.

Is there any way that dream could be redirected elsewhere? I hate to see $70,000 in student loan debt being used untapped. Okay, so she didn't make it to medical school.

Did she know being a physician's assistant is very lucrative and almost akin to being a doctor? A nurse practiticioner? A midwife? There are so many other options.

It seems like there should have been a Plan B and Plan C given that high amount of money spent.

[Joan.of.the.Arch]

Looks to me that sooner or later the house they have will need to be sold. If they only owe $88,000 yet have payments of $1277, they probably have a fair amount of equity and a fairly large house. I'm guessing they are in Detroit. Just as they might not get as much on a sale as they'd like, they might not have to pay much for a much smaller house. A sale possibly could bring them out ahead, even in the near future.

How are rental rates? They should not rule out becoming renters. Renting need not be thought of as a step backward. If one can live in a decent neighborhood and come out ahead financially, renting could be a step ahead....Just something to consider.

And with only one child at home, 15 years old, they need not move to a large place at all.

I know some people think of their house as an investment, that it serves a fine purpose as they are raising their children, but that in retirement years they can cash it out and have some provision for themselves. This couple may need to cash it out now (more or less). It is probably no longer an investment increasing with any kind of decent return, anyway. Is it actually decreasing?! Iwould not be surprised to see that they could invest the money differently, better--in IRAs, for starters.

The income sounds awfully low for two 55 year old adults with three jobs. Really, that sounds like two 25 year olds with three jobs. Have they made no advancements in wages over the years? Perhaps they have some superb benefits which have made them stay with these jobs. Medical-dental-vision fully paid any covering everything under the sun, perhaps? Maybe the public works job comes with some kind of unusual valuable benefits such as free public utilities or city secured, reduced mortgage interest rates? (I know my city, one in many ways similar to Detroit, has toyed with interesting benefits to try to recruit and retain some of their lower paid but crucial employees.). So maybe their income is not really telling the full story.

As a public employee, does the one not have a retirement benefit? Has it been optional and he declined participation? Will both or either of them have social security? Retirement may be a little bleak, but doable.

Really, I think your relative needs to post here for himself.

[anonymous_saver]

Mortgage balance: $88k ($1277./mo.)
Student Loan........: $70k (590./mo.)
HELOC..................: $25k (277./mo.)
CC VISA................: $5k ($55./mo.)
Sears......................: $3k ($32./mo.)
Home Depot.........: $2k ($29./mo.)

After regular expenses they say that they suspect to have an extra $300 to $400 that they could add to snowballing their debts.

The are both in their mid 50's and have no retirement savings.
WNTBDF

(1) Save a $1,000 emergency fund.
(2) Have them both start retirement accounts, starting in your mid-50's scares me... a lot. Have them put up to their employers match into their retirement accounts, maybe a target retirement account would be good for now until they gain the financial knowledge to pick and choose their own funds. This is very important for them to start, even though they are in a lot of debt, this is where I highly disagree with Dave Ramsey, Suze Orman's book on the Young Fabulous and Broke book has some great information as well, and it doesn't matter if they are in their mid-50's, it still has very relevent information.
(3) Challenge them to write down all of their expenses, I highly suspect that they probably don't have the $300-$400 extra each month, tell them to cancel cable, internet, only have a land line or a cell phone - not both, no magazine or newspaper subscriptions. These are extras that they could allow themselves if they were in a much better situation.
(4) I think they should highly think of downsizing their home. They only have 3 people living in the house, and in a few years it will probably only be the two of them. They probably don't need more than a 2-3 bedroom house. Would they think of doing this?
(5) You say they live in a big city. I would get ride of all cars, and use the public transportation system. This would save them tons of money. Would they consider this?
(6) Have them list all their debts as you did above, but with their interest rates as well. Pay off the highest interest rate first (another disagreement that a lot of us have with Dave Ramsey), have them put all of their extra money each month towards this. Once one debt is gone, go to the next highest interest debt.
(7) And of course, they should not use their credit cards at all until they pay off these debts off. Here is a good paying off debt calculator that they could try using. Calculators - Debt reduction planner There are many others online though. This can help them determine how long it will take them to pay off the debt. This isn't only for credit cards, you can put all other debt as well. Also, have them make sure that when they put extra payments towards their debts that they are paying towards the principal only and not the interest!
By the way, I think it's great that you gave them the Dave Ramsey book. It has some good basics in it. But paying off higher interest debt first instead of the smallest debt first, pays it off faster. Paying the smallest debt first helps you psychologically.

Keep trying to help your family with this, it sounds like you are big help.

[jIM_Ohio]

I think their age may be a factor here. What is it? If they are "10 years older than us", where does that put them? Why the student loans? Did they go to college late or is that from their kids?

Most of the time I am a "retire the debt" kind of a guy.

But in this case, since time is running out on them they may want to start immediately saving for retirement.

The only caveat I would add is to retire the consumer debt first with snowballing and then do a combo of debt reduction/retirement saving after that.

EDIT: Whoops - they are mid 50's - see that now.

My plan:

1. Retire consumer debt.
2. Start saving for retirement
3. Retire student loan debt
4. Retire HELOC
5. Retire mortgage

My prognosis is poor for them though, starting this late and with that kind of relative low income.

Scanner's advice echos mine. He assumed interest rates on consumer debt is higher than student loan debt and HELOC and Mortgage. I might make the same assumption, but I will ask- what are the interest rates on these loans?

They can retire. The issue is the aggressiveness #1 and #2 are done. If 40% of their income is used for #1 and #2 combined, they have hope, as they are training themselves to live below their means and also gives a high incentive to save more.

4) and 5) are not even on the table for me in this case- assuming these rates are around 6%, I think most investments chosen in 2) would be around 8% returns. In addition I would steer them away from bonds because of the mortgage debt. I would pay down mortgage before investing in bonds in this case.

[Scanner]

JimOhio is right - I assumed the consumer debt was running 12%+. If it's not, you could switch around 1 and 2.

Unfortunately, you are going to have to take a bit more risk than someone who has some principal to protect.

I may go with the Vanguard Wellington Fund (or a similar mirror) the entire 10 years up til age 65 (assuming they are 55).

They don't really have to worry about principal loss. . .because there's no principal to lose at this point.

Now, if they get to age 60 or 62 and they have $100,000 or so. . .maybe then they could switch to a zero coupon bond fund of some sort to protect principal.

The main factor is going to a lifestyle change and can they do it and do it for 10 years.

[jIM_Ohio]

JimOhio is right - I assumed the consumer debt was running 12%+. If it's not, you could switch around 1 and 2.

Unfortunately, you are going to have to take a bit more risk than someone who has some principal to protect.

I may go with the Vanguard Wellington Fund (or a similar mirror) the entire 10 years up til age 65 (assuming they are 55).

They don't really have to worry about principal loss. . .because there's no principal to lose at this point.

Now, if they get to age 60 or 62 and they have $100,000 or so. . .maybe then they could switch to a zero coupon bond fund of some sort to protect principal.

The main factor is going to a lifestyle change and can they do it and do it for 10 years.

56k income suggests 1.4M is needed to replace 100% of income. Making some assumptions (mortgage goes away-$41,000 income needed,
$1200/month of debt payments & investments not needed-$27,000 of income needed)

27,000 is less than half the 56k they make now. SS can cover much of this, IMO. $675,000 will replace 100% of 27k income.

In have calculated they can invest $1200/month once debt is paid off.
In 17 years, they would have enough saved. Here is the table.

1 $0 $14,400 10% $15,840
2 $15,840 $14,400 10% $33,264
3 $33,264 $14,400 10% $52,430
4 $52,430 $14,400 10% $73,513
5 $73,513 $14,400 10% $96,705
6 $96,705 $14,400 10% $122,215
7 $122,215 $14,400 10% $150,277
8 $150,277 $14,400 10% $181,144
9 $181,144 $14,400 10% $215,099
10 $215,099 $14,400 10% $252,449
11 $252,449 $14,400 10% $293,534
12 $293,534 $14,400 10% $338,727
13 $338,727 $14,400 10% $388,440
14 $388,440 $14,400 10% $443,124
15 $443,124 $14,400 10% $503,276
16 $503,276 $14,400 10% $569,444
17 $569,444 $14,400 10% $642,228

This assumes a 10% return and investment of $1200/month.

Obviously the assumptions suggests 105k of debt gets paid off first.

Cut the investment to $6,000, and it will take 25 years

1 $0 $6,000 10% $6,600
2 $6,600 $6,000 10% $13,860
3 $13,860 $6,000 10% $21,846
4 $21,846 $6,000 10% $30,631
5 $30,631 $6,000 10% $40,294
6 $40,294 $6,000 10% $50,923
7 $50,923 $6,000 10% $62,615
8 $62,615 $6,000 10% $75,477
9 $75,477 $6,000 10% $89,625
10 $89,625 $6,000 10% $105,187
11 $105,187 $6,000 10% $122,306
12 $122,306 $6,000 10% $141,136
13 $141,136 $6,000 10% $161,850
14 $161,850 $6,000 10% $184,635
15 $184,635 $6,000 10% $209,698
16 $209,698 $6,000 10% $237,268
17 $237,268 $6,000 10% $267,595
18 $267,595 $6,000 10% $300,955
19 $300,955 $6,000 10% $337,650
20 $337,650 $6,000 10% $378,015
21 $378,015 $6,000 10% $422,416
22 $422,416 $6,000 10% $471,258
23 $471,258 $6,000 10% $524,984
24 $524,984 $6,000 10% $584,082
25 $584,082 $6,000 10% $649,091

The pro with waiting longer is the $675k need goes down, as year 25 in this case put them close to age 75, so maybe around year 20 is actual retirement.

Do they know their expected SS monthly benefit in todays dollars?

[anonymous_saver]

I would also say that once the debt is paid off (except the mortgage) I would say that they would instantly need to max out IRA's for both of them, put up to the match in their 401(k)/403(b)'s, and additional money in the 401(k)/403(b)'s if possible (it would likely be since the debt would be virtually gone).

I second the question about the Depart of Recreation job, are you sure there is no pension plan or retiremtn plan options with a match there?

[LivingAlmostLarge]

They need to sell their home period. Check out the millionaire mommy next door. The house needs to go. Sorry they can't afford it. They will be better off renting. Renting will allow them to stabilize their finances.

Second they can't pay for college. They need to focus on retirement. The couple needs to sit their son down now at 15 and tell him they can't afford to pay for college, he'd better look for scholarships or military.

Third, they need contribute to retirement up to the max. They also probably can't retire until 65 or 70. And even then they may need to work part-time