Dear Bruce: Early retirement will take discipline
October 22, 2012
DEAR BRUCE: I am wondering if I should contribute less to my 401(k) so that I can afford to refinance my mortgage from a 30-year to a 15-year term. I'm 46 years old, and I have $90,000 in my 401(k). I contribute 17 percent of my before-tax income. I make $54,000 per year.
Currently, I have a 30-year mortgage on a loan of $145,000, with a 4.875 percent interest rate. I am considering refinancing to a 15-year term at 2.875 percent. My goal is to retire before age 60, but I need my house to be paid off to make that happen. — L.P., Seattle
DEAR L.P.: I believe your plan to retire by 60, while it may be desirable, is a tad ambitious. You didn't indicate whether any other pensions are involved, but with the numbers you've shown, I don't see how in the world you can retire by then. You can shoot for that, but don't be disappointed if you have to work a few more years, particularly since your Social Security cannot begin until you've reached at least age 62 under most circumstances.
I would be very much in favor of reducing your mortgage interest rate. My only caution is that you not build all or almost all of your retirement planning around the value of your house. As current history demonstrates — and as far too many people have learned firsthand — the value of real estate can drop precipitously. Continue to contribute as much as you can to your 401(k).
DEAR BRUCE: My husband and I have a 14-month-old son. My spouse is a stay-at-home dad, in part because he is an excellent and doting father, but more because he is horrible with employment and money. For years into his adulthood he lived with his mother, who fed and clothed him, while he worked when he felt like it and spent all the money he made on alcohol and toys. He mismanaged his money for years, not paying credit card bills and defaulting on cell phone plans, even if he had the money to pay them.
While fatherhood has changed a lot of his attitudes and habits, I am the working parent and manage all of the money in the household. Still, he is bad with money, and it burns a hole in his pocket. If I give him $20 for a very specific purpose, it inevitably gets spent within the hour on something else, while he swears up and down that he heard me say the money was for that thing. As can be expected, he has lousy credit, and we have no joint accounts. I love him very much for his other wonderful qualities, but I do not trust him with money.
This all said, I have life insurance that upon my death would pay off our house and provide enough income for him to raise our child. I believe, however, that if he received a lump sum, he would not manage this money well. Is there any way to put into a will or trust that the money would have to be managed by an accountant and that he would receive an allowance for a certain number of years?
I am also concerned about the ongoing welfare of our son and my husband's ability to care for him on his own. Is there any way to mandate that receipt of life insurance money is dependent upon satisfactory review of living conditions and his ability to care for our son? My belief is that if he becomes unable to care for our son, the life insurance money should go to the appointed guardian.
In addition, are you aware of any rigorous educational courses for adults who are this bad with money to help them learn money management skills? — A.S., Shrewsbury, Mass.
DEAR A.S.: You mentioned you have a 14-month-old son. It also appears you have a preadolescent husband, and that is a real problem. I'm happy that he is enjoying his stay-at-home dad job, but it seems to me that you have married into a remarkably tenuous situation.
In terms of the life insurance, a trust could be set up rather than a lump-sum payment to your husband in the event of your early demise. That way, he would receive something similar to a paycheck every month. You also mention that if he is unable to care for your son, the life insurance money should go to an appointed guardian. That is a very tricky proposition, and you should consult with an attorney. It may be difficult to exclude your husband altogether.
There are courses and programs for adults who are as inept and undisciplined as your husband. You might check with social services in your area for some recommendations.
You're to be congratulated for your tolerance and appreciation of your husband's other wonderful qualities. Hopefully, there is some rehabilitation in his future. You are carrying a great deal of weight, and I certainly wish you well.
Send questions to email@example.com or to Smart Money, P.O. Box 7150, Hudson, FL 34674. Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.