The ideal vision of retirement is different for many people. This week we look at a man ready to look at retirement options and to focus on his life’s passion.
The situation
George, 63, is an art history professor at a small liberal arts college. He has been teaching for 19 years and earns $107,000 per year. He enjoys working with the students but is ready to cut back and focus on his true love, scenic paintings. He spends approximately $2,000 per month on home renovations and upkeep and the remainder of his monthly income is spent on living and miscellaneous expenses.
George’s home is valued at $450,000. He recently refinanced the home with a 30-year, fixed-rate mortgage. The loan has an interest rate of 4.125 percent, and he now owes $319,345. George’s pension fund has $131,430 and he has an additional $49,000 in a supplemental account.
Admitting that retirement savings has never been on the forefront of his mind, George worries that he has not positioned himself to be able to leave the college any time soon. He explained to Pam, “I have been careless with money my entire life, and now I am worried.”
George wrote in to What’s The Plan to discuss all possible retirement options and what his next steps should be.
When asked to estimate his retirement need, he predicted approximately $5,000 per month to cover his expenses and still provide resources for painting.
“Will I be able to ever be able to make painting my full-time job?” he asks.
Recommendations
First things first: George needs to stop saying that he is careless with money! The past is gone; it’s now time to focus on how he will be smart with money. But it is important for George to start now, because waiting any longer will only delay his dreams of capturing the sunrise and sunset over the mountains each day.
The free resource, , could help George track where his money goes each month. This would allow him to see his miscellaneous spending areas and create a realistic budget to stick to. He needs to prevent taking on any additional debt and begin consciously saving.
I recommend that George cut back on the unnecessary house renovations and use that $2,000 per month to invest in a 403(b) plan. George is currently in a high tax bracket, and investing in a deferred-compensation plan is a better tax decision than investing the money in a Roth IRA.
Our projections show that George can retire at the age of 66 with an income of approximately $4,125 per month after federal and state taxes. This amount combines income from his savings, pension, and reduced Social Security payments.
But if he increases his savings now by $2,000 per month, his retirement income jumps to approximately $4,500 per month after tax.
If George chooses not to invest this additional $2,000 per month, he would need to wait until age 70 for his monthly income to be approximately $4,500. Growth in his pension and social-security payouts would drive this increase.
George is extremely bright; he knows what he needs to do in order to set himself up for success. But before our meeting, he wasn’t prepared to face them. He promised to start immediately and take control of his finances.
The more George puts away now, the better off he will be — and the sooner he can start painting full time.
Pam Dumonceau has 21 years of experience in the financial planning industry. What’s the Plan is not a substitute for financial planning or dedicated professional advice.
What’s your plan?
Ask Pam what you should do — e-mail whatstheplan @consistentvalues.com to get advice. Names and identifying information are changed to protect confidentiality, and there’s no charge to be featured in the column.
