Yes, Virginia, there is a Santa Claus! This week we look at a single mother who doesn’t believe she can remain secure in retirement.
The Situation
Virginia, 68, and her twin son and daughter live in Littleton. The twins recently turned 18 and will start college in August.
Their father is present in their lives emotionally but has never contributed financially, leaving Virginia to carry the load. She has provided a comfortable life for her children and has built a nice nest egg for herself.
Two years ago, Virginia was laid off from her engineering job and forced into retirement. She receives a Social Security retirement benefit of $2,032 per month, and her kids receive an additional $2,094 as her dependents. The kids’ Social Security will end in May when they graduate from high school. Virginia thinks she must return to work to replace this income but would rather not.
In addition to her Social Security, she receives a monthly pension benefit of $577. Her $476,209 IRA balance is invested in a moderate 60/40 stock bond portfolio. She currently owes $12,986 in credit card debt interest and $23,180 on a car loan with three years left to pay. Her home is valued at $330,000, and the remaining mortgage is $105,000, which will be paid off in nine years. Virginia also has a Home Equity Loan balance of $8,062.
Virginia wrote into What’s the Plan to ask whether she has to go back to work and whether she should withdraw from her IRA to pay for college for the twins. She is thinking about giving the twins $100,000 of her IRA to pay for college because she thinks her assets will disqualify her 4.0 GPA students from scholarships and financial aid.
Recommendations
We recommend that Virginia use her retirement to support herself and not the twins’ college expenses. Our projections show that if Virginia retains all of her IRA balance for her own retirement income, she can spend about $4,100 per month, after taxes, adjusted for inflation, during retirement. This will cover her living expenses without making any big lifestyle changes.
Maintaining her financial independence will be her gift of dignity to herself and to her kids. By preserving her retirement assets now, she’ll avoid having to move in with her kids later.
When filling out the Free Application for Federal Student Aid request form, IRA balances are excluded from Virginia’s expected contribution to college expenses.
We urge her to file her income taxes as soon as possible in the new year and apply for financial aid so she and the twins can make plans for paying for college that will include financial aid, scholarships, grants, loans, work study and so on.
Yes, Virginia, there is a Santa Claus! Your kids will probably receive more aid than you thought, and you can relax. You don’t have to go back to work.
Pam Dumonceau has 22 years of experience and is the principal of Consistent Values, a Registered Investment Advisory firm in Greenwood Village. What’s the Plan is not a substitute for financial planning or dedicated professional advice.
What’s your plan?
Ask financial planner Pam Dumonceau what you should do — e-mail whatstheplan@consistent to get advice. Names and identifying information are changed to protect confidentiality.
