What to do when you can’t afford your life
Dear Liz: I am 54 and my wife is 49. Because of a career change I made four years ago and my wife’s layoff, we have run up $50,000 in credit card debt and $61,000 on a home equity line of credit. In addition, our home is worth at least $40,000 less than what we owe on it. I have tried twice for a loan modification but was turned down. We had a late payment one month, so the bank will not consider a refinance for at least a year. We are current on everything, but just barely. We have no savings because we use all our income for bills. We have a child in college and another who is a junior in high school preparing for college. I feel like a hamster on a treadmill just waiting for a total financial collapse and certainly have no hope of ever retiring. In addition, I totally hate my job and its industry and feel like I’m in living hell. I have an MBA but think I may need more training to make me more competitive in the job market. Any suggestions?
Answer: Clearly you can’t afford your life. The fact that you incurred debt to switch to a career field you now hate indicates that you’re prone to making rash decisions. So the most important thing is that you thoroughly research your options before making your next step.
Contact a housing counselor approved by the Housing and Urban Development Department to discuss your loan modification options. You can get referrals from http://www.hud.gov. The modification process is so torturous and complex it can really pay to have an experienced hand guide you, but you shouldn’t pay thousands of dollars to an attorney or other “expert” when you can get low-cost or even free advice from a HUD-approved housing counselor.
If you can’t get a modification and your home costs are eating up more than 30% of your monthly income, seriously consider a short sale so you can move to a more affordable place. Here you will want an attorney’s help, because short-sale negotiations can be tough and the lender can keep you on the hook for the remaining debt if your agreement isn’t worded properly.
You’ll need to have a talk with your children as well. This will be difficult, but if you aren’t saving sufficiently for retirement, you can’t afford to help them with education costs. Your kids can get a college education on their own by working and using federal student loans, but they may need to switch to cheaper schools.
Think long and hard before you borrow any more money, for job training or anything else. A session with a career counselor could help you define other jobs you could get with your existing credentials. If you do need more training, get it the most cost-effective way possible. Nonprofit community colleges offer inexpensive courses at night that would allow you to keep your day job.
Although you don’t think you’ll ever be able to retire, at some point you won’t be able to continue working. Your priority should be to pay off your debt and build up your retirement savings so that you have more to live on than Social Security checks. Everything that doesn’t serve those goals has to be discarded, as difficult and painful as that may be.
Self-employed? You’ve got more retirement savings options
Dear Liz: I’m 50 and self-employed. I am trying to save as much as possible for retirement. I’ve put the maximum allowable in my IRA ($6,000). What else can I do? Would contributing to a Roth at this age be advisable? What other options are out there?
Answer: You’re lucky — you actually have more options to save for retirement than people who don’t own their businesses, if you can spare the cash to make significant contributions.
You can contribute up to $14,000 annually to a SIMPLE IRA (the limit is $11,500 for people under 50). Another option is a simplified employee pension, or SEP. You can contribute as much as 20% of your net business profit or 25% of your salary (if you pay yourself with a W-2) to a maximum of $49,000 in 2011. For more details on SIMPLEs and SEPs, see IRS Publication 590.
If you want to contribute more than the SIMPLE’s $14,000 limit but a SEP won’t allow you to put aside enough, you can contribute a greater percentage of your income to a solo 401(k) or a solo Roth 401(k). With these plans, you can contribute 100% of your first $22,000 in income from the business (or $16,500 if you’re under 50), plus 20% of net profit, until you hit the $54,400 maximum for those 50 and older ($49,000 is the maximum for younger people). Your contribution to a solo 401(k) would be tax deductible, while your contribution to a Roth 401(k) would not be, but your withdrawals in retirement would be tax free.
If you’re really taking in the dough, consider a traditional, defined-benefit pension plan. These plans can cost thousands of dollars to set up and administer, but you can put aside hundreds of thousands of dollars a year.
You can take advantage of any of these options and contribute an additional $6,000 to a Roth IRA. (You can’t, however, contribute $6,000 each to both a traditional IRA and a Roth IRA; the limit for both accounts combined is $6,000.) Having at least some money in a tax-free retirement bucket can give you more flexibility to control your tax bill in retirement.
You’ll probably want a tax professional’s advice, since retirement can be a complex area to navigate.
Stocks: a must or a gamble?
Dear Liz: I’ve asked a fee-only advisor, a fee-based advisor and a full-service broker about investing in stocks, and their response is always the same — that I should diversify across multiple investment types, consider my risk tolerance and invest regularly to take advantage of dips in stock prices. They tell me that because I’m young I can be more aggressive with my retirement funds to make them grow. But no matter what these folks say, I think the emperor has no clothes: The stock market is one big gambling venture and we’ve all been scammed into believing otherwise. Frankly, I feel like I’m risking all of my retirement funds by leaving them in the market. (Remember the Reagan-era bust? The dot-com bust? The housing market bust?) Though the stock market seems to be the only game in town (CD rates are 2% or lower, real estate is still risky, who can afford gold?), and those invested in the game tell me I’d be foolish not to play, I feel like I’m between a rock and a hard place. Is this all in my head or do I have a rational basis for my skepticism?
Answer: Remember the Depression? World Wars I and II? The Cold War? The assassination of President Kennedy? Vietnam? Watergate?
Probably not, because you weren’t around. Regardless of the setbacks we’ve faced, however, our economy — and stocks — continue to grow.
Investing in stocks is essentially investing in the productivity of our companies. If you want a graphic representation of that growth, use a search engine to find a chart showing “Dow Jones historical average.” You’ll see that this market benchmark has had numerous setbacks, many of them serious, but its growth has been exponential. The Dow started 1932 at 100, for example; in the 1970s, it bobbed around 1,000; it started this year well over 11,000.
Yes, there will be scams and scandals and people gaming the system. The fact remains that no other investment has the inflation-beating history or potential that stocks have. If you hope to retire someday, a good portion of your portfolio likely needs to be in stocks.
As for gold, here’s another little bit of history you should know. Although it’s been on a tear lately, the price of gold still hasn’t returned to the peak in value it enjoyed in 1980, once you adjust for inflation.
With retirement, there’s no making up for lost time
Dear Liz: You say that retirement saving should always come first. What if I have no debt except a mortgage and am paying into retirement and college savings plans, but also choosing to accelerate my mortgage payments? I’m 40 and will pay off my mortgage in two years. I could probably do better by putting the extra principal payments into retirement funds, but psychologically it feels great to pay off the mortgage. I plan to accelerate my retirement saving after paying off the mortgage. What do you think?
Answer: There’s nothing wrong with paying down a mortgage as long as you’re saving enough for retirement and your other important financial goals.
The problem comes when people skimp on their retirement savings, thinking they can make up for lost time later. They typically can’t, and the longer they delay adequate contributions to their retirement, the more hopelessly behind they fall.
Don’t drain your retirement to pay debts
Dear Liz: My husband and I are struggling with whether to file for bankruptcy. We have $80,000 in credit card debt, which has ballooned because of high interest rates and our paying only the minimum. My husband and I were both laid off in 2008. I collected unemployment for not quite a year and still have not been able to find work. My husband found a job after a year and a half, but then was injured at work and faces another four to six months of recovery, so he is receiving only 67% of his former wage. Now we can’t keep up with our bills. We have stopped paying three of our credit cards and are getting hounded to no end. We are trying to sell our house but even that is not selling. We have nothing left. No retirement, no savings, just debt. We are drowning. We both have such a hard time with the idea of filing for bankruptcy, but is it time?
Answer: People can sometimes avoid bankruptcy if they seek help early enough. If they’re able to pay more than the minimums on their credit cards, for example, they may be able to use a legitimate credit counselor’s debt management plan to pay off their debt.
But debt management plans require that you have at least some disposable income. If you can’t keep up with your bills or find employment, that doesn’t describe your situation.
You still can contact a creditor counselor via the National Foundation for Credit Counseling at http://www.nfcc.org, but you also should contact an experienced bankruptcy attorney (you can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org). You may not want to file, but you may not have much choice, particularly if you want the collection calls to stop.
What’s especially sad is that you apparently drained your retirement to pay your bills. Your retirement money would have been protected from creditors, but you essentially threw good money after bad. Retirement money should be left alone for retirement, so you can support yourself in your old age. Anyone who’s considering draining a retirement account or home equity to pay credit card debt or medical bills should first consult a bankruptcy attorney to understand the ramifications of this often-foolish act.
