Reader Case Study: Longterm Planning When You Have a Chronic Illness


Katie and Arden live on beautiful Cape Cod in Massachusetts and have a passion for travel, spending time on the water, renovating their home, and enjoying life. Katie has Cystic Fibrosis and would like our advice on how to plan for retirement while still living it up with her husband, friends, and family in the near term.

Case Studies are financial and life dilemmas that a reader of Frugalwoods sends to me requesting that Frugalwoods nation weigh in. Then, Frugalwoods nation (that’s you!), reads through their situation and provides advice, encouragement, insight, and feedback in the comments section. For an example, check out last month’s case study.

I provide updates from our Case Study subjects at the bottom of each Case Study several months after a Case is featured. You all requested an easier way to track Case Study updates and I have heard your pleas :)! Here’s list of all the Case Studies that currently have an update provided at the end of the post (and a hint that if you’re a past Case Study participant who hasn’t sent me your update yet, send it on over–your fans want to hear from you!):

I probably don’t need to say the following because you all are the kindest, most polite commenters on the internet, but, please note that Frugalwoods is a judgement-free zone where we endeavor to help one another, not to condemn.

And a disclaimer that I am not a trained financial professional and I encourage people not to make serious financial decisions based solely on what one person on the internet advises. I encourage everyone to do their own research to determine the best course of action for their finances.

With that I’ll let Katie, this month’s Case Study subject, take it from here!

Katie’s Story

Katie and Arden

Hello, Frugalwoods Nation! I’m Katie, I’m 30 years old and I work as a high school guidance counselor. My husband Arden is 35 years old and works as a solar installer. Our other family member is Panjami, an affordable cat who’s a bit of an attention seeker.

We live on Cape Cod in Massachusetts. Arden and I have a close-knit family and a great circle of friends. We spend a lot of time with everyone at regular potlucks, game nights, and family dinners. My husband and I also enjoy traveling, eating out at restaurants, spending time on our boat, picnicking on the water, and epic beach days. Cooking together, dancing, wine/cider tastings, and chocolate chip cookies dipped in milk round out our primary interests and hobbies.

We’re Also In School!

I’m currently taking classes to earn a special education administrative license, which I’m cash flowing through a 529 we set up for our future babies (we put $200 per month into that fund). I have just one class left but I love school and so I’m sure I’ll continue in some fashion. I received my undergraduate degree from Suffolk University in Public Relations and Journalism and I also have a Masters in Teaching and Curriculum from Boston University as well as a Masters in School Counseling from Bridgewater State.

Arden is also in school right now studying to become an electrician. We’re cash flowing his program as well at $1,000 per year. He has one year left until he can take the electrician’s exam. When he passes, this should lead to a substantial raise at his current job.

Health Issues and TTC

Katie and Arden’s adorable cat

I have Cystic Fibrosis and while I’m doing very well currently, it’s impossible to predict if/when my health will decline. This knowledge makes it really tough for us to prioritize retirement savings. Since it’s possible I will die young, it’s far too easy to fall into the “live it up” mentality through travel, eating out, and experiences.

Furthermore, it’s possible I will have to stop working early (prior to retirement age) due to my health. I’m struggling with how to best financially prepare for these potential outcomes and to balance that with our desire to enjoy life while we can.

Arden and I have also been trying to conceive (TTC) a baby for about three years and recently began pursuing fertility treatments. Thankfully, our health insurance will cover most of these costs. Due to my health issues, we have concerns that I might not be able to work for some or all of my pregnancy. I’m also aware that it would be very  difficult to work and raise a baby while doing everything else (including prioritizing my health). Given that, I’m wondering if there’s a way for me to stop working for awhile surrounding my eventual pregnancy and birth of our first child.

A quick note on our insurance:

  • Arden has a $500k 30-year life insurance policy that will bring us until he turns 60.
  • I have a $125k life insurance policy through my employer, but due to my Cystic Fibrosis I’m uninsurable through regular plans.
  • We both have long-term disability policies, mine is through my employer and Arden’s isn’t.
  • We receive excellent health and dental coverage through my employer.
  • I also have a short-term disability plan through work.
  • We pay for identity theft protection, but I’m unsure if this is worth the expense.

Katie’s Job and Volunteer Work

I volunteer as a Special Education Surrogate Parent for students in foster care, which I greatly enjoy. For my day job, I work as a guidance counselor at a charter school and have a two-hour round trip commute. I love what I’m doing, but with hoping for children of my own and my health concerns, the commute takes a lot out of me. Plus, I would appreciate the security and pay raise that would accompany a public school position with a union. I’d really like to find a job at a public school closer to our home.

Arden’s Art

Arden is an artist and would like to get back to making things and possibly developing a business plan to generate supplemental income from this work. He started making glass jewelry and selling items at craft shows when he was in high school, but began working at a solar company shortly after we met and slowly stopped making things as his time focused more on his day job. He’d love to be able to work 20-30 hours a week at his day job and make and sell art the rest of the time. To help facilitate this, Arden plans to build an art studio on the property of our primary residence (see details and cost estimate below).

Our Two Homes: Primary Residence and Rental Cottage

Arden and I own two homes: our primary residence on Cape Cod and our second “summer” cottage, which we rent out year-round, with the exception of the one to two weeks we spend vacationing there every summer.

Katie and Arden’s home

We owe $262,475.67 on our primary residence and have a 30-year fixed rate mortgage that terminates in 2046. We pay $186 in PMI monthly which kills me, but our interest rate is only 3.75%.We have an FHA loan so the PMI won’t drop off, we would need to refinance in order to accomplish that. The amount due each month is $1,890 but we currently pay $2,000 monthly, which will have us paying the house off four years earlier in 2042. We are considering paying $2,500 a month, which would allow us to pay off the house in 2034.

We are usually in the middle of a home renovation project on our primary residence and have been paying cash for these with bonuses or income from our rental property, We generally do two projects a year and end up spending between $5k-$10k yearly on renovations. Arden does all of the work himself so the cost is only for materials. Next up, we’ll be putting in hardwood floors and renovating an upstairs bedroom. After that project is finished, Arden would like to build an art studio for himself on the property, which we estimate will cost around $20k. Once the studio is built, these costs should greatly reduce (which’ll be in about three years).

Katie and Arden’s fabulous home

Our vacation cottage was our first home and Arden completely renovated it himself while we lived there. We vacation there every summer for one to two weeks and we rent it out weekly during the rest of the summer. In the winters, we have a full-time renter to cover the expenses in the off-season.

Since I don’t work in the summer, I manage and clean the property. This property brings in about $14k yearly after expenses and we have a 30-year mortgage with a 4.25% interest rate and no PMI. We owe $183,347.07 on this house and it’ll be paid off in 2046. We have been using the income to cash flow renovations at our primary home, but would like advice on what to do with this rental income in the future.

We feel good about owning these two homes because we plan to live in this area for the longterm and have no plans to ever move off the Cape. Almost all of our close family lives within 10 minutes of us and we are very family-oriented. This proximity will also be great for our future childcare considerations! We plan on remaining in our current home for the longterm and we are also very attached to our cottage. I could see us buying another property in the area in the future to use a second rental.

A Love of Travel

Katie and Arden with friends

Arden and I have been going on two international vacations every year for the past few years while trying unsuccessfully to start a family. We also spend a week at our cottage and go on weekend trips a few times a year and travel somewhere in the US. We plan on cutting this back to one international trip yearly, one US trip yearly (maybe), and switch to spending two weeks at our cottage.

Once we have a child this will probably be much less: I’m thinking two weeks at our cottage and maybe a couple weekends away (at least until our future kids are older). So I’d estimate this’ll be about a max of $2k yearly.

In 2018 we went to Spain, which cost $2,850, and to Scotland and England, which was $5,500. We also took weekend trips to Vermont, New Hampshire, Maine, Provincetown, and more! These weekend trips averaged $500 each. In 2019, we plan to visit Nashville, TN for around $1,000 and go back to Spain for about $3,000. This $4,000 total will cut our vacation costs in half for 2019.

Katie and Arden’s Near-Term Goals:

  • Finish renovating our primary home and continue to cash flow any minor renovations
  • Build an art studio in the backyard for Arden
  • Set up a simple, automatic system for our retirement savings
  • Get pregnant and have a healthy mom and healthy baby
  • Find a job closer to home (Katie)
  • Have no credit card balance… ever
  • Take one international trip every year
  • Take one domestic trip every year
  • Spend two weeks at our cottage every year
  • Pay off both of our homes early
  • Have little to no stress about money
  • Have bi-weekly meetings about our finances

Where Katie and Arden Want To Be In 10 years:

  • Finances:
    • Katie: I would like to be stress free related to finances: not using credit cards, no debt, having bi-weekly meetings with Arden, saving up for vacations/other goals and consistently paying extra on our mortgages.
    • Arden: I would like to have enough income that we have more flexibility with working, be on track for retirement, have no debt, and have one of our homes paid off.
  • Lifestyle:
    • Katie: I would like to be raising empathetic, well-adjusted children with good senses of humor, taking annual international and domestic vacations, and enjoying our cottage more.
    • Arden: I would like to have more free time, be raising children, and going on family vacations.
    • Kate + Arden: boating, enjoying the beaches, reading, cooking, dancing, etc!
  • Career: 
    • Katie: I would like to be working closer to home in a public school as a school counselor.
    • Arden: I would like to be working less and have more freedom to pick and choose what I would like to do. I will likely still be doing electrical and working in the solar field. I would also like to have my art studio built where I can make glass again and hopefully earn an income from that, which would allow me to be home more.

Katie and Arden’s Finances

Income

Item Amount Notes
Arden’s income – net including bonuses $4,510.00 Annual Salary:  $54,130.00. The $4,510 = total net including bonuses. I averaged in his 2x yearly bonuses, but weekly we receive much less. and it’s variable based on the week. Average $700 weekly take home so it’s usually only $2,800.00 monthly. A concern I have is that much of our income comes in at various points during the year and so we have a much smaller amount to work with in our regular weekly/monthly budget. Also, the bonuses are subject to change which could possibly reduce Arden’s income by about $20k, which is always a consideration.
Katie’s income – net $3,114.74 Annual Salary: $57,493.80 Paid bi-weekly. This is after taxes ($543.06), Family Health Insurance ($329.60), Family Dental ($25.66), STD ($21.80), LTD ($13.78), Katie’s pension 11%= $486.48 Life Insurance – 125k policy attached to work = ($7.48)
Cottage Income (gross; mortgage included under “Monthly Expenses”) $2,705.00 We made $32,457.13 in 2018. We only make a profit during the summer. Winter rental only covers the mortgage. We have historically used the extra income to pay for large purchases/renovations, but not sure where to put this money in the future once we are done renovating. NET profit for 2018 was around $14k.
Tax Return $417.00 Arden pays $18,729.59 yearly in taxes (this is so high because about a third of his yearly income is from profit sharing/bonuses). Katie pays $6516.72 yearly in taxes. Variable but we generally get about $5k back each year which we have historically used to pay down CC debt. I’m thinking about using the tax return to pay for a yearly vacation… or should we adjust our taxes to get more in our checks?
SREC credits from solar panels $166.00 We receive quarterly payments and will for 10 years. It averages to $500 a quarter ($2,000 a year)
Monthly Subtotal: $10,912.74 This varies greatly by month in light of Arden’s bonuses and the fact that the cottage only generates a profit in the summer months (it breaks even in winter).
Annual Total: $130,956.00 Including net take-home with Arden’s bonuses, the cottage income (before expenses), SREC income, average tax refund of 5k, and not including the deductions taken out, which are noted above

Monthly Expenses

Item Amount Notes (all values averaged over the last 12 months of expenses)
Primary Mortgage $1,891.42 30 year fixed rate 3.75%. We currently have 27 years left on the loan. This includes taxes and insurance.
Rental Cottage Mortgage $1,065.22 30 year fixed rate loan, 4.125% interest, no PMI. Includes taxes and insurance with 27 years left
Home Improvements $915.00 We are usually in the middle of a home renovation project but are paying for these with bonuses or income from our rental. Next up is hardwood floors and renovating an upstairs bedroom. After that Arden would like to build an art studio on the property which we estimate will cost up to $20k total. So these costs should greatly reduce in about 3 years. We pay for all renovations with cash from cottage income & bonuses. We generally do two projects a year and end up spending between 5-10k yearly on home renovations. Arden does all of the work so the cost is only for materials/missed work. 2018: Bought hardwood floors for $2,500, Completed upstairs bathroom 5k, 2 Mini-splits  -3.5k
Vacations $500.00 We have been going on 2 international vacations the past few years while trying unsuccessfully to start a family and spending a week at the cottage. We also go on weekend trips away a few times a year and travel somewhere in the US as well sometimes. We plan on cutting this back to 1 international trip yearly, 1 US trip yearly (maybe), and switch to 2 weeks at our cottage. Once we have a child this will probably be much much less (2 weeks at our cottage and maybe a couple weekends away until kids are older = max of 2k yearly. In 2018 we went to Spain ($2,850.00) and then to Scotland/England ($5,500.00) . We also went to VT, NH, ME, P-Town,  etc. for weekends that average around $500 per weekend. In 2019, we plan to visit Nashville, TN – $1000 and go back to Spain – $3000 which will cut our vacation costs in 1/2 for 2019.
Groceries and household supplies $400.00 We have been spending less on this during the past year and have been eating out much more but this will be the average once our eating out gets reduced. It may actually go up if we greatly reduce our eating out. Includes toiletries and household goods
Eating Out/Entertainment/Alcohol $400.00 This is a crazy area for us. This is usually from going out on dates and this cost is in excess of our spending $$
Katie’s Spending Money $400.00 We each get $100 weekly. We use this to cover eating out, $100 gas for my car, clothing, massages, homegoods etc.
Arden’s Spending Money $400.00 We each get $100 weekly. We use this to cover coffee, eating out, gas ($60-80), clothing, alcohol, gambling, etc.
Additional Health Insurance $322.00 Due to Katie’s extensive medical costs, we keep an additional insurance plan through MassHealth that covers most copays and greatly reduces our prescription costs but we could lose this at anytime
Extra payments on primary home mortgage $109.00 We’ve been paying $2k monthly but the minimum is $1,891 and are planning on raising that to $2,500 as soon as we are able to in order to pay it off in 15 years.
NY 529 College Fund $200.00 This is for our future children but Katie has been pulling from it to pay for continuing classes for her Admin certificate. It stays at $0 after each semester.
Gas for cars $200.00 We have two cars and Katie drives 2 hours roundtrip to work daily (Arden’s gas is only $60-$80 monthly and generally comes out of his spending money). Katie puts $100 of spending money towards gas but this is the excess cost.
Continuing Education $175.00 Arden is currently taking night classes to get his electrical license and will be done at the end of 2019; Katie is taking an administration certificate program with one more class. $6,000 = total 2018 cost. 2019 cost will be much lower at K- $1200 and A – $900. This should raise Ardens income about $10 an hour. Katie is not sure if Admin is something she is going to pursue at this point.
Cable/Internet $161.85 Comcast. I have looked into dropping our cable and just having internet but the cheapest is $110 a month just for internet and there are no other options in the area.
Cottage Utilities: Gas/Electric & Cable/Internet (only in summer) $148.08 During the winter these costs are paid for by our winter renter but I pay them through our budget and keep the winter utility $$ in the cottage account to have a small buffer Electric =496.52 Gas =780 yearly = $1277 total. We also pay for cable/internet during the summer which is about $100 a month for 5 months so $500. I just averaged the monthly costs but our costs monthly vary.
Gifts $125.00 I shop for Christmas ($1,000 total) year round and birthdays and weddings as needed. Trying to switch to homemade as much as possible.
Car Insurance $113.29 Geico. comp/collision. 2011 Honda Accord & 2008 Toyota Matrix
Katie’s mom’s electric bill $108.00 My mom pays for my cell phone and I pay for her electric, which was $1,295 for the year of 2018
Extra payments on rental cottage  mortgage $100.00 Trying to pay this off early.
Medical Expenses $100.00 This varies but includes medications and co-pays
Donations/Volunteering $100.00 We make regular donations to the Cystic Fibrosis Foundation, to anyone we know that asks us (any health related request) and around the holidays do a “White Envelope” for each other. Katie volunteers as a Special Education Surrogate Parent for students in foster care.
Utilities: Electricity for primary residence $99.08 Have solar but this past year have had higher than normal costs – average of the last 12 months.  $1189 in 2018
Utilities: Gas for primary residence $89.92 Gas hot water and heat. Will be lower in the future since we got mini-splits and it is raising our electric costs  = $1079 yearly
Medical Deductible (Arden) $83.00 Some years this is 0, but it can be up to $1000
Misc Bills $77.00 HOA Fees (105 + 65) Excise taxes ( A-$38.50, K- $60, boat- $15) Beach sticker ($45) Water ($100), Boat insurance ($246.00), Annual vet bill for cat ($100), Zander idenity theft insurance ($145)
Arden’s LTD $41.00 $486.12 yearly through Zander. Pay quarterly.
Arden’s Life Insurance $33.00 Auto withdrawn monthly. A $500K policy will bring Arden to age 60
Amazon Prime $5.99 I feel like we should cancel this and maybe spend less money on Amazon in general.
Bank of America monthly fee for an extra account $4.95 Not happy about this but I like to have my spending money in a different account
Cell Phones (two) $0.00 Arden’s work pays for his phone (Verizon). My phone (an iPhone 8 through AT&T) costs about $100 but I am on a plan with my mother so I pay her electric bill and she pays for my phone. My phone also is utilized as a health device as I have a Dexcom CGM and it tells me my blood glucose every 5 minutes.
Monthly Total: $8,467.80
Annual Total: $101,613.60

Assets

Item Amount Notes
Katie’s Pension $22,000.00 This is in a pension program and is not accessible until Katie is age 61. Mandatory 11% of Katies salary. If I work for 34 years until age 61, I will receive 80% of the average of my top 3 years of salary. I expect my highest earnings to be around $100k or possible $150k if I go into administration.
Arden’s 403b $7,653.79 Through his employer. Not currently contributing. Work would match 3%.
Katie’s 403b $2,791.24 Through employer. Not currently contributing. No employer match
Rental Cottage Checking Account $2,500.00 We keep a $1k emergency fund and cottage $$ in this account, the cottage mortgage is paid out of this. It’s through First Citizens.
Roth IRA – Katie $1,291.63 Individual Stocks through TD Ameritrade
Checking Account $900.00 We pay all of our bills out of this account. It’s through Bank of America.
Roth IRA – Arden $288.93 Individual Stocks through TD Ameritrade
Savings Account – Katie $100.00 $100 weekly goes into this account for Katies spending $$. It’s through Bank of America.
Savings Account – Arden $100.00 $100 weekly goes into this account for Arden’s spending money. It’s through Cape Cod 5.
Total: $37,625.59

Vehicles

Vehicle Valued At Notes (all are paid off)
Bayliner Element (boat) $12,000 Small speedboat
2011 Honda Accord $8,000 2011 with 150k miles
2008 Toyota Matrix $5,000 2008 with 90k miles

Debts

Item Amount Notes
Primary House Mortgage $262,475.67 30 year fixed rate mortgage at 3.75% interest. Includes taxes, insurance, and monthly PMI payment of $182.49. We have equity of around $90,000.
Rental Cottage Mortgage $183,347.07 All rental income goes into a separate account to pay for the cottage’s mortgage payment ($1265.22) and then I pull from the excess in account to pay for our home renovations/vacations, etc. We currently owe $183,774 on a 30 year fixed rate mortgage at 4.125% interest with no PMI and a payoff date of 2045. We have equity of around $50,000.
Medical (Allergy) Bill $620 0% interest. We didn’t realize that this was going towards Arden’s deductible.
Chase Credit Card $500 18.24% interest rate. We would like to only use credit cards while on vacation because we don’t have the best discipline with them. We try to pay off these types of bills as quickly as possible and  will likely do so within the next month or so.
Total: $446,942.74

Katie’s Questions For You:

  1. Retirement:
    • How much should we be putting into retirement every year and where? We feel like we’re behind on this and would like it to be as streamlined as possible. Below is what we currently have:
      • Katie will receive a pension at age 61 that will provide 80% of the average of her five highest earning years. A bit will come off due to taxes and picking the plan that will provide a portion of the pension for Arden when Katie dies so I think it should be around $60K a year projecting out a salary of around $100K. I’ve also contributed around $3k to a 403b (contributions are on hold) and $1,500 to a Roth IRA. My employer does not offer a retirement contribution match.
      • Arden has close to $8k in a 403b through work and his work provides a 3% match (contribution are on hold). He also has $500 in a Roth IRA (we started these IRAs with the best of intentions, but no plan on how to handle the contributions). Arden will also receive social security of around $18k per year at age 67.
  2. Family:
    • We’ve been trying to conceive for about three years and recently began pursuing fertility treatments. Thankfully, our health insurance will cover most of these costs. Due to my health issues, we have concerns that I might not be able to work for some or all of my eventual pregnancy. I’m also aware that it would be very difficult to work and raise a baby while doing everything else, including prioritizing my health.
    • Given that, I’m wondering if there’s a way for me to stop working for awhile surrounding the eventual pregnancy and birth of our first child. Is this an option for us?
  3. Katie’s Health:
    • In light of my Cystic Fibrosis, it’s impossible for us to predict if/when my health will decline. This makes it hard for us to prioritize retirement savings.
    • Since it’s possible I will die young, how do Arden and I balance our desire to travel, eat out, have fun, and live it up with longer term financial planning?
    • Additionally, it’s possible I’ll have to stop working early (prior to retirement age) due to my health. How do we best prepare for this from a financial perspective?
  4. Cars:
    • We own two paid-off cars: a 2008 Toyota Matrix (with 90k miles) and a 2011 Honda Accord (with 150k miles). Given theses ages and mileages, we anticipate needing at purchase at least one new-to-us car in the next two to four years.
    • How much should we save for this and where should we stash this money?
  5. Mortgages:
    • We’re considering increasing our mortgage pay-off on our primary residence to $2,500 a month (we currently pay $2,000 per month; $1,891.42 is what’s actually due each month). This increased monthly payment would allow us to pay off the house in 2034. Do you recommend this?

Mrs. Frugalwoods’ Recommendations

Katie and Arden

I commend Katie for putting together this thoughtful reflection on where she and her husband are in life and where they’d like to go. It’s not easy to set goals or plan for the future and Katie brought a level of introspection that’s remarkable. Katie is upfront about her Cystic Fibrosis and her mortality, which speaks volumes to her judgement and character.

I’m impressed with how thorough she and Arden were in mapping out not just their plans for the next few years, but really for the rest of their lives. I’m inspired by her optimism and fortitude to make these tough decisions and to be willing to open up her life for all of us to reflect on and offer advice. Thank you, Katie, for being a brave and confident voice.

Katie knows herself well–always the first step in financial management–so I’m going to dive right into her questions.

Katie’s Question #1: Retirement Planning

Katie is spot on that she and Arden are behind on retirement savings. No reason to sugar coat this. At ages 30 and 35, they have some catching up to do. But I’m not worried–I know they can do this. What Katie articulated is that she and Arden would like a simple, straightforward way to save for their retirements and, thankfully, we can offer that for them today.

Katie and Arden’s awesome house

I advise that Katie and Arden begin contributing to their employer-sponsored 403b plans. Today. As in, right this minute. If they do nothing else, this’ll be the single greatest positive impact on their futures. Why do I think the 403b plans are the way to go versus their Roth IRAs? Several reasons:

  1. Arden’s employer offers a match. When your employer offers matching retirement funds, that is FREE MONEY people. In almost every instance, you should contribute to a matching retirement plan. I have an entire post on why, which Katie and Arden should check out so that they have a deeper understanding on the topic: 401ks Are Your Friend. They really are. Sidenote: a 403b is identical to a 401k, it’s just what it’s called when you work for a nonprofit/educational institution.
  2. Katie and Arden should be able to set up automatic contributions to their 403b plans. The advantage here is that they’ll never see this money and thus won’t ever be tempted to spend it. The money will scuttle right out of their paychecks and straight into their 403bs with zero chances to be spent along the way. I love automatic contribution systems for this very reason! It takes the work and the mental anguish out of saving. So, Katie and Arden, speak with your HR departments today and get those automatic contributions set up.
  3. Katie noted that they’d opened Roth IRAs–which don’t get me wrong IS a good thing–but then didn’t have a plan for how to contribute money to them. This is why I’m so in love with the automatic contribution to the 403b idea: takes all the effort out of it.
    • Sidenote: It’s possible that the tax liabilities would pencil out better with the Roth IRAs, but I would say that’s not very likely. Katie and Arden should feel free to research this, but if it’s all a wash tax-wise, I’d go with the more straightforward approach of automatic contributions to their 403bs. Plus, Arden has the fabulous opportunity to get that match from his employer!

How much should Katie and Arden each contribute to their 403bs? 

  • I can’t offer a specific answer here, but I will reiterate Katie’s assessment that they’re quite behind on saving for retirement.
  • What I might suggest is to set the lofty goal for both Katie and Arden to aim for maxing out their accounts.
  • What does maxing out mean? It means contributing the maximum amount to a 403b that’s allowed by the IRS, which for 2019 is $19,000 per person per year (which would be $1,583.33 per person every month). This is a lot of money, don’t get me wrong! But Katie and Arden make great salaries and could have the room in their budget to make this happen.
  • If $19k each feels unmanageable, that’s ok too! Katie and Arden can see that dollar amount as a goal and something to work towards over the next few years.

How much money do Katie and Arden need in order to retire?

This is another question that only Katie and Arden can truly answer, but there are some general guideposts they can reference.  Fidelity outlines this rule of thumb:

Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.

Applying this rule, Katie and Arden should have saved one times their combined gross salaries, which would be 1 x ($54,130 + $57,493.80) = $116,238. While this might seem insurmountable right now, I’m not worried about Katie and Arden. While they have some catching up to do–and I do recommend prioritizing retirement savings–I’m confident they’ll get there. We’re going to address where this money might come from in just a moment, so fear not!

They should also factor in that Katie might either elect to–or need to–stop working due to pregnancy, childcare, or her health. Keeping that in mind is another reason to bump up the 403b contributions to the max right now.

Don’t Count On Katie’s Pension

I know it’s tempting to count on a pension and to calculate that as part of retirement. And it very well might be part of their future. However, since Katie noted that her pension requires her to work at the same job until she’s 61, I encourage her to take into account how far into the future that is. Katie mentioned that she’d like to change jobs now (in order to reduce her commute) and so, if it were me, I wouldn’t count the pension as something to rely on in retirement. There’s also the risk of her employer defaulting on the pension, something we’ve sadly seen happen far too often in recent years.

Updated with additional pension information from Katie:

My pension is tied to the state of MA, not just my current position. So as long as I remain in an MA school system I will still be part of this pension plan, which is my intention. The state could go down (that would be very, very bad), but is less likely than a specific company going under. If I work to 61, I would get 80%; disability retirement brings you to age 60 on the chart and then just how many years which is a lot less but I would still get something. I think your advice in that area is still applicable due to me not necessarily being able to make it to 61. 🙂

My updated advice:

I agree with Katie that the state of MA is much less likely to default on its pension program than a private employer. Plus, since Katie intends to remain working within the MA public school system, she has a much greater likelihood of seeing payout of this pension. That being said, it’s still a gamble since the money isn’t hers until age 60. Conversely with a 403b, the money is always hers, whether she stops working next year or in 30 years.

Katie’s Questions #2 and #3: Could Katie stop working surrounding the birth of their first child and how should they plan for the potential of a forced early retirement for Katie?

Katie and Arden’s lovely home

I combined these questions because they both address the same root question: Katie’s salary. More specifically, Katie and Arden’s dependence on her salary. At their current spending level, I know Katie and Arden can see it wouldn’t be feasible to eliminate Katie’s income from their lives. Here’s the quick math:

Katie and Arden spend (on average) $8,467.80 per month and their monthly income (on average) is $10,912.74. Katie’s monthly net take-home pay is $3,114.74. If she were to stop working, their new monthly income would be $7,798 (current total income $10,912.74 – Katie’s income $3,114.74 = $7,798). Since they spend $8,467.80 per month, this would put them in debt to the tune of $669.80 per month. Not feasible.

However–and I know Katie knows exactly where I’m going with this–if she and Arden are able to commit to reducing their monthly expenditures, it will be entirely possible for her to stop working if/when it becomes imperative that she do so. I want Katie to have options. To have the option to be home with her future children if she so chooses and the option to prioritize her health when she needs to. I don’t want Katie to be in the position of needing to work long past when it’s healthy or safe for her to do so. Let’s get down to making that happen for her!

Live On Arden’s Salary

Before we get to everyone’s favorite feature–the expense review!–let’s discuss how to consider the absence of Katie’s salary. If I’m reading her thoughts correctly, it sounds to me like Katie is saying it’s WHEN she’ll need/choose to stop working, not IF. In light of that, one of the most straightforward ways for Katie and Arden to plan for this eventuality is to start living on Arden’s base salary every month (plus their rental income).

Arden makes good money, but a challenge with his income is that he receives periodic bonuses and so his take-home pay fluctuates quite a bit. This can make it tough to plan and so what I would do is live only on his base salary and funnel his bonuses into retirement/other savings accounts. This way, if an anticipated bonus doesn’t arrive one year (or is less than anticipated), Katie and Arden aren’t in danger of going into debt or not being able to pay their bills. This approach would make the bonuses fabulous but not mandatory for their survival.

Since the advice to live only on Arden’s base salary somewhat conflicts my previous advice to max out their 403bs… what I would do are several (not just one!) practice months of not spending a penny of Katie’s salary. Test out what it’s like to only spend Arden’s income. This is the only true way to analyze how it’ll be possible for Katie to stop working.

Research Arden’s Health Insurance Options

Katie noted that she and Arden are both covered by her employer’s health and dental plans. If Katie were to stop working, the family would need to migrate to Arden’s employer’s plan. I imagine Katie has already done this, but, she should thoroughly research the plan offered by Arden’s employer to ensure it would adequately cover her Cystic Fibrosis, fertility treatments, and maternity care. Further, she should calculate the change in benefit payments every month if they switched to Arden’s health and dental plans.

Expense Review

Everything we’ve talked about thus far leads us to the bottom line that Katie and Arden need to reduce their spending in order to meet their goals.

Katie and Arden’s wedding

In every Case Study, I like to point out that what you choose to save or not save is a very personal decision. Cutting every last expense is NOT the right answer for everyone and I am NOT an advocate for making yourself miserable in the process of achieving financial stability. I AM an advocate for values-based, goal-oriented spending. I think it’s important to assess whether all of your expenses bring you fulfillment and a good return on your investment.

I think it’s also important to question if your rate of savings will help you to achieve your long-term goals. But what you spend on? That’s a very personal choice and one you have to make for yourself. My job is to identify areas where you might be able to save, but only you can decide what level of savings is right for you. If you’re struggling with where to save more and how to map out a longterm financial plan, I encourage you to take my free 31-day Uber Frugal Month Challenge.

I’ve gone through their expenses and created two spreadsheets (below) to demonstrate areas where they might be able to save. I did so with the goal of gaming out two scenarios:

  1. The ability to max out their 403b contributions.
  2. The ability to live off of Arden’s salary.

Since these are somewhat conflicting goals, I made not one, but TWO spreadsheets outlining different possibilities for Katie and Arden. The first spreadsheet shows how they could save enough to max out their 403b contributions every month, which as we noted above, would be $1,583.33 per person per month (a total of $3,166.66 each month).

Scenario 1: 403b Max Out Budget

Item Current Amount Mrs. FW’s notes Proposed New Amount Amount Saved
Primary Mortgage $1,891.42 Fixed expense, no change. $1,891.42 $0
Rental Cottage Mortgage $1,065.22 Fixed expense, no change. $1,065.22 $0
Home Improvements $915.00 Katie noted she anticipates these costs reducing in the next three years. I am concerned about the $20K price tag she cited for Arden to build an art studio and so I’ve written notes on that below. For now, I’ll leave this as is since it sounds like they’re in the middle of several projects. $915.00 $0
Vacations $500.00 Katie said that their 2019 vacation plans will cut their vacation spending in half, which is good! I too love travel and I want Katie and Arden to be able to experience the world. But they can’t mortgage their future in order to do so. Taming this spending will help immensely. $250 $250
Groceries and household supplies $400.00 This is a great price for groceries and household items for two people. Katie noted, however, that it’s likely so low due to the next line item: eating out. $400 $0
Eating Out/Entertainment/Alcohol $400.00 Whoa buddy! I am cognizant that Katie and Arden want to enjoy life, but right now they are spending a whopping $1,200 PER MONTH between this category and their individual spending money line items. I think they already know what I’m going to say here: time to reduce these amounts. Not eliminate, but reduce. By a lot. $100 $300
Katie’s Spending Money $400.00 Same notes as above. I don’t think they need to completely do away with this fun money, but $1,200 per month just isn’t tenable at their current salary levels and their dire need to catch up on retirement savings. $50 $350
Arden’s Spending Money $400.00 Same notes as above. I don’t think they need to completely do away with this fun money, but $1,200 per month just isn’t tenable at their current salary levels and their dire need to catch up on retirement savings. $50 $350
Additional Health Insurance $322.00 Fixed expense, no change. $322.00 $0
Extra payments on primary home mortgage $109.00 Cease these extra payments ASAP. I’ve written notes on why below. $0 $109.00
NY 529 College Fund $200.00 Once Katie is finished with her current program, I would put these contributions on hold until their kid(s) are born. $0 $200
Gas for cars $200.00 I am hopeful that Katie can find a job closer to home. A two-hour roundtrip commute doesn’t sound fun and the gas is certainly expensive. I’ll leave it as is for now, but if Katie can change jobs, this could be greatly reduced. $200 $0
Continuing Education $175.00 Katie’s notes: “Arden is taking night classes to get his electrical license and will be done at the end of 2019; Katie is taking an administration certificate program with one more class. Total 2019 costs will be $2,100.”

I’lll leave this as is for now, but after their programs are finished, this line item can go to $0.

$175.00 $0
Cable/Internet $161.85 Katie’s notes: “Comcast. I’ve looked into dropping our cable and just having internet but the cheapest is $110 a month just for internet and there are no other options in the area.”

I encourage Katie to keep after Comcast to try and finagle a cheaper rate for just internet. I was able to do that when we lived in Cambridge by calling them and (nicely) negotiating a better price. It’s worth a call! If $110 is the best they can do for internet, Katie and Arden should go ahead and drop cable because they’ll save $51.85 a month!

$110 $51.85
Cottage Utilities: Gas/Electric & Cable/Internet (only in summer) $148.08 Fixed expense, no change. $148.08 $0
Gifts $125.00 Katie’s notes, “I shop for Christmas ($1,000 total) year round and birthdays and weddings as needed. Trying to switch to homemade as much as possible.”

Katie’s inclination to switch to homemade is spot on. While $1,500 per year for gifts isn’t astronomical, it’s more than they can afford right now, especially as they consider increasing their 403b contributions and living on Arden’s base salary alone. I have a number of posts on how to give thoughtful, frugal gifts that might help:

$50 $75
Car Insurance $113.29 This isn’t awful, but I’d advise Katie to shop around and see if a better rate might be available. Since they have older cars, it’s possible they could find a cheaper deal. $113.29 $0
Katie’s mom’s electric bill $108.00 Katie’s notes, “My mom pays for my cell phone and I pay for her electric, which was $1,295 for the year of 2018.”

Time for a new cell phone plan! Katie said she has an iPhone on AT&T and so she should look for an MVNO (that’s a wireless reseller) who offers AT&T service. It’s totally possible to port a number out of AT&T (as long as you’re not under contract). I did this a few years ago with my iPhone and am now paying $19.99 per month through BOOM Mobile.

Katie should get her mom onto this cheaper plan as well. No reason to be paying so much for cell service every month! A few other popular MVNOs are: Ting, Mint, and Republic Wireless.

I advise Katie to stop the electric bil/phone bill trade off, unless there are extenuating circumstances and Katie wants to help her mom out by covering this bill for her. The new amount I’ve listed would be for one cell phone on a cheaper MVNO plan.

$20 $88
Extra payments on rental cottage  mortgage $100.00 Cease these extra payments ASAP. I’ve written notes on why below. $0 $100
Medical Expenses $100.00 Fixed expense, no change. $100.00 $0
Donations/Volunteering $100.00 This might be an area where Katie and Arden could consider contributing some of their weekly spending money. Or not. Just throwing out different ideas. $100.00 $0
Utilities: Electricity for primary residence $99.08 This seems really high, especially considering they have solar. I’m wondering what’s behind this? I encourage Katie and Arden to do an energy audit to try and figure out where all of this expense is coming from. I’ll leave it as is, but I recommend getting an energy use monitor to try and figure out the root cause of this bill. $99.08 $0
Utilities: Gas for primary residence $89.92 Fixed expense, no change. $89.92 $0
Medical Deductible (Arden) $83.00 Fixed expense, no change. $83 $0
HOA Fees (105 + 65) Excise taxes ( A-$38.50, K- $60, boat- $15) Beach sticker ($45) Water ($100), Boat insurance ($246.00), Annual vet bill for cat ($100), Zander identity theft insurance ($145) $77.00 I’m not sure that the identity theft insurance is worth it. I’m not an expert on this, but seems like something that could be eliminated. $65 $12
Arden’s LTD $41.00 I think longterm disability insurance is a great idea given the physical nature of Arden’s job. I commend them for having this! $41 $0
Arden’s Life Insurance $33.00 Fixed expense, no change. $33 $0
Amazon Prime $5.99 Katie’s note, “I feel like we should cancel this and maybe spend less money on Amazon in general.”

This isn’t a huge line item, but if Katie thinks it might help them save more to not have the temptation of Amazon Prime, then I’d suggest trying an experiment. Get rid of Prime and keep track of shipping costs and figure out where the better deal is.

$0 $5.99
Bank of America monthly fee for an extra account $4.95 I highly recommend Katie and Arden find a different bank. There are plenty of banks that offer multiple checking/savings accounts with no fees. Don’t pay fees on something like this! I happen to use Fidelity and I have multiple accounts, which I’m not charged for. There are lot of other banks that offer this as well. $0 $4.95
Cell Phones (two) $0.00 See my notes above under “Katie’s Mom’s Electric Bill.” $0 $0
Current Monthly Subtotal: $8,367.80 Proposed New Monthly Subtotal: $6,471.01 $1,897
Current Annual Total: $101,613.60 Proposed New Annual Total: $77,652.12 $22,764.00

Their monthly income is, on average, $10,912.74. This monthly income amount factors in Arden’s bonuses, which aren’t consistent, as well as their rental income, which only comes in during the summer months. Katie and Arden would need to judiciously save these bonuses and rental income in order to smooth out their earnings throughout the year.

If Katie and Arden decided to reduce their spending to the above proposed $6,471.01 per month, they’d be able to both max out their 403bs (at a total of $3,166.66) and still have $1,275.07 leftover every month to put into a savings account to build up an emergency fund.

Scenario 2: Live on Arden’s Base Salary Budget

To help Katie visualize what their spending would need to look like in order for her to stop working, I’ve gone through their expenses again and made even deeper cuts than in scenario #1.

Item Current Amount Mrs. FW’s notes Proposed New Amount Amount Saved
Primary Mortgage $1,891.42 Fixed expense, no change. $1,891.42 $0
Rental Cottage Mortgage $1,065.22 Fixed expense, no change. $1,065.22 $0
Home Improvements $915.00 Katie noted she anticipates these costs reducing in the next three years. I am concerned about the $20K price tag she cited for Arden to build an art studio and so I’ve written notes on that below. For now, I’ll leave this as is since it sounds like they’re in the middle of several projects. $700.00 $215
Vacations $500.00 Katie said that their 2019 vacation plans will cut their vacation spending in half, which is good! I too love travel and I want Katie and Arden to be able to experience the world. But they can’t mortgage their future in order to do so. Taming this spending will help immensely. $0 $500
Groceries and household supplies $400.00 This is a great price for groceries and household items for two people. Katie noted, however, that it’s likely so low due to the next line item: eating out. $400 $0
Eating Out/Entertainment/Alcohol $400.00 Whoa buddy! I am cognizant that Katie and Arden want to enjoy life, but right now they are spending a whopping $1,200 PER MONTH between this category and their individual spending money line items. I think they already know what I’m going to say here: time to reduce these amounts. Not eliminate, but reduce. By a lot. $0 $400
Katie’s Spending Money $400.00 Same notes as above. I don’t think they need to completely do away with this fun money, but $1,200 per month just isn’t tenable at their current salary levels and their dire need to catch up on retirement savings. $0 $400
Arden’s Spending Money $400.00 Same notes as above. I don’t think they need to completely do away with this fun money, but $1,200 per month just isn’t tenable at their current salary levels and their dire need to catch up on retirement savings. $0 $400
Additional Health Insurance $322.00 Fixed expense, no change. $322.00 $0
Extra payments on primary home mortgage $109.00 Cease these extra payments ASAP. I’ve written notes on why below. $0 $109.00
NY 529 College Fund $200.00 Once Katie is finished with her current program, I would put these contributions on hold until their kid(s) are born. $0 $200
Gas for cars $200.00 I am hopeful tha Katie can find a job closer to home. A two-hour roundtrip commute doesn’t sound fun and the gas is certainly expensive. I’ll leave it as is for now, but if Katie can change jobs, this could be greatly reduced. $200 $0
Continuing Education $175.00 Katie’s notes: “Arden is taking night classes to get his electrical license and will be done at the end of 2019; Katie is taking an administration certificate program with one more class. Total 2019 costs will be $2,100.”

I’lll leave this as is for now, but after their programs are finished, this line item can go to $0.

$175.00 $0
Cable/Internet $161.85 Katie’s notes: “Comcast. I’ve looked into dropping our cable and just having internet but the cheapest is $110 a month just for internet and there are no other options in the area.”

I encourage Katie to keep after Comcast to try and finagle a cheaper rate for just internet. I was able to do that when we lived in Cambridge by calling them and (nicely) negotiating a better price. It’s worth a call! If $110 is the best they can do for internet, Katie and Arden should go ahead and drop cable because they’ll save $51.85 a month!

$110 $51.85
Cottage Utilities: Gas/Electric & Cable/Internet (only in summer) $148.08 Fixed expense, no change. $148.08 $0
Gifts $125.00 Katie’s notes, “I shop for Christmas ($1,000 total) year round and birthdays and weddings as needed. Trying to switch to homemade as much as possible.”

Katie’s inclination to switch to homemade is spot on. While $1,500 per year for gifts isn’t astronomical, it’s more than they can afford right now, especially as they consider increasing their 403b contributions and living on Arden’s base salary alone. I have a number of posts on how to give thoughtful, frugal gifts that might help:

$25 $100
Car Insurance $113.29 This isn’t awful, but I’d advise Katie to shop around and see if a better rate might be available. Since they have older cars, it’s possible they could find a cheaper deal. $113.29 $0
Katie’s mom’s electric bill $108.00 Katie’s notes, “My mom pays for my cell phone and I pay for her electric, which was $1,295 for the year of 2018.”

Time for a new cell phone plan! Katie said she has an iPhone on AT&T and so she should look for an MVNO (that’s a wireless reseller) who offers AT&T service. It’s totally possible to port a number out of AT&T (as long as you’re not under contract). I did this a few years ago with my iPhone and am now paying $19.99 per month through BOOM Mobile.

Katie should get her mom onto this cheaper plan as well. No reason to be paying so much for cell service every month! A few other popular MVNOs are: Ting, Mint, and Republic Wireless.

I advise Katie to stop the electric bil/phone bill trade off, unless there are extenuating circumstances and Katie wants to help her mom out by covering this bill for her. The new amount I’ve listed would be for one cell phone on a cheaper MVNO plan.

$20 $88
Extra payments on rental cottage  mortgage $100.00 Cease these extra payments ASAP. I’ve written notes on why below. $0 $100
Medical Expenses $100.00 Fixed expense, no change. $100.00 $0
Donations/Volunteering $100.00 This might be an area where Katie and Arden could consider contributing some of their weekly spending money. Or not. Just throwing out different ideas. $0.00 $100
Utilities: Electricity for primary residence $99.08 This seems really high, especially considering they have solar. I’m wondering what’s behind this? I encourage Katie and Arden to do an energy audit to try and figure out where all of this expense is coming from. I’ll leave it as is, but I recommend getting an energy use monitor to try and figure out the root cause of this bill. $99.08 $0
Utilities: Gas for primary residence $89.92 Fixed expense, no change. $89.92 $0
Medical Deductible (Arden) $83.00 Fixed expense, no change. $83 $0
HOA Fees (105 + 65) Excise taxes ( A-$38.50, K- $60, boat- $15) Beach sticker ($45) Water ($100), Boat insurance ($246.00), Annual vet bill for cat ($100), Zander identity theft insurance ($145) $77.00 I’m not sure that the identity theft insurance is worth it. I’m not an expert on this, but seems like something that could be eliminated. $65 $12
Arden’s LTD $41.00 I think longterm disability insurance is a great idea given the physical nature of Arden’s job. I commend them for having this! $41 $0
Arden’s Life Insurance $33.00 Fixed expense, no change. $33 $0
Amazon Prime $5.99 Katie’s note, “I feel like we should cancel this and maybe spend less money on Amazon in general.”

This isn’t a huge line item, but if Katie thinks it might help them save more to not have the temptation of Amazon Prime, then I’d suggest trying an experiment. Get rid of Prime and keep track of shipping costs and figure out where the better deal is.

$0 $5.99
Bank of America monthly fee for an extra account $4.95 I highly recommend Katie and Arden find a different bank. There are plenty of banks that offer multiple checking/savings accounts with no fees. Don’t pay fees on something like this! I happen to use Fidelity and I have multiple accounts, which I’m not charged for. There are lot of other banks that offer this as well. $0 $4.95
Cell Phones (two) $0.00 See my notes above under “Katie’s Mom’s Electric Bill.” $0 $0
Current Monthly Subtotal: $8,367.80 Proposed New Monthly Subtotal: $5,681.01 $2,687
Current Annual Total: $101,613.60 Proposed New Annual Total: $68,172.12 $32,244.00

This outlines some pretty dramatic cuts to their spending, but, it does get their monthly expenses down to a level that would be manageable on Arden’s base salary alone, which is outlined in the next spreadsheet:

Household Income Without Katie’s Salary

Item Amount Notes
Arden’s base net income – NOT including bonuses $2,800.00 Annual Salary:  $54,130.00. The $4,510 = total net including bonuses. I averaged in his 2x yearly bonuses, but weekly we receive much less. and it’s variable based on the week. Average $700 weekly take home so it’s usually only $2,800.00 monthly. A concern I have is that much of our income comes in at various points during the year and so we have a much smaller amount to work with in our regular weekly/monthly budget. Also, the bonuses are subject to change which could possibly reduce Arden’s income by about $20k, which is always a consideration.
Katie’s income – net $0.00 In this scenario, Katie is no longer working.
Cottage Income (gross; mortgage included under “Monthly Expenses”) $2,705.00 We made $32,457.13 in 2018. We only make a profit during the summer. Winter rental only covers the mortgage. We have historically used the extra income to pay for large purchases/renovations, but not sure where to put this money in the future once we are done renovating. NET profit for 2018 was around $14k.
Tax Return $417.00 Arden pays $18,729.59 yearly in taxes (this is so high because about a third of his yearly income is from profit sharing/bonuses). Katie pays $6516.72 yearly in taxes. Variable but we generally get about $5k back each year which we have historically used to pay down CC debt. I’m thinking about using the tax return to pay for a yearly vacation… or should we adjust our taxes to get more in our checks?
SREC credits from solar panels $166.00 We receive quarterly payments and will for 10 years. It averages to $500 a quarter ($2,000 a year)
Monthly Subtotal: $6,088.00 Again, this varies greatly by month in light of Arden’s bonuses and the fact that the cottage only generates a profit in the summer months (it breaks even in winter).

The above illustrates Katie and Arden’s net monthly income on Arden’s base salary alone (without factoring in his bonuses). The reason I eliminated the bonuses for this exercise is for clarity. Kate and Arden need to be able to live on his base salary alone should those bonuses be eliminated due to a financial downturn of the broader economy, a financial downturn at his company, new management at his company, a change in bonus structures, etc. To be safe, and to ensure they can swing this, I want Katie and Arden to project as conservatively as possible. Then, they can be super duper excited when Arden receives a bonus, as opposed to facing a crisis if he doesn’t.

If Katie and Arden decided to make all of the scenario #2 reductions in their spending, their monthly expenses would total $5,681.01. Their income minus Katie’s salary would be $6,088.00, which means they’d have $406.99 leftover every month for emergency fund savings. Unfortunately, what this budget doesn’t include are retirement savings, which is a bit of a problem. However, there’s a solution! Arden’s bonuses could all be put towards his 403b account. Might not sound like an exciting way to use a bonus, but, it would mean that Katie could stop working and their finances would be in decent shape.

It’s also likely they’d pay less in taxes if Katie quit her job, but then on the other hand, their health insurance premiums might be higher. And then there’s the potential cost of children.

Renovations And Arden’s Art Studio

Katie and Arden’s gorgeous home

One of the largest line items in Katie and Arden’s budget is for renovations. I know that Arden would like to build an art studio on their property, but at $20k, that would put a serious damper on both their retirement savings and the ability for Katie to stop working.

But I love the idea of Arden making art! I wonder if there’s a way for Arden to create art without a dedicated studio? If there’s a halfway solution that he could employ–the basement, the garage, a friend’s house?–while he develops a business plan, perhaps he could then cash flow the building of a studio through sales of his art. I’d be nervous about such a major expenditure without a clear revenue plan attached to it.

Another consideration here is their boat. Both a boat and an art studio are luxuries and so I wonder if there might be a reckoning here over which is more important. Perhaps not and perhaps the answer is that both are important, but I just wanted to throw that out there for consideration.

Katie’s Question #4: New-to-us Cars?

I am giving Katie and Arden a standing ovation for their excellent car-related decisions. Owning two reliable, paid-off, older cars is FABULOUS. They have no car payment, which frees their money up for so many other things!!!!

Katie and Arden

Also, I’m thrilled that they buy used cars!!! Buying a new car is a horrendous idea and buying a car you can’t afford is a similarly horrendous idea (with the caveat that sometimes a person must have a car in order to get to work and doesn’t have the liquidity to buy in cash). But if you DO have the liquidity–or the option to WAIT and save up–you will put yourself miles ahead financially.

All that to say, they’ve done an excellent job in the car department thus far and their 2008 Toyota Matrix (with 90k miles) and 2011 Honda Accord (with 150k miles) are just getting broken in. Come on, guys, these things are barely driven ;)!!! Mere babies. My husband and I have a 2010 Toyota Tundra (with 140k miles) and a 2010 Toyota Prius (with 129k miles) and we have zero plans to replace either of these cars anytime soon. Seriously, there is no need to replace a car every few years!!! I do recommend that Katie and Arden create a savings account of cash (more on that below), but I don’t think that buying a car should be at the top of their list of ways to use that money.

Here’s more on why buying (and keeping) used cars is such a great idea:

Katie’s Question #5: Paying Off The Mortgages Early?

As I noted in the above spreadsheets, I personally wouldn’t prioritize paying off their two mortgages at accelerated rates primarily because they’re so behind on retirement savings. In my opinion, all of their extra money should be funneled into their 403bs. This debate is as old as the hills and people fall into one camp or another, but for what it’s worth, here are my thoughts:

  • A paid-off house is a wonderful thing, but you can’t use a paid-off house to buy groceries or pay for health insurance if you’ve lost your a job (you might be able to get a Home Equity Line Of Credit, but that’s not a guarantee and certainly not if you’ve lost your jobs). A paid-off house is an illiquid asset (unless you’re able to sell it quickly, which is an unknown).
  • There are opportunity costs to paying off a mortgage. Namely, you’re missing out on the potential investment returns you’d enjoy if your money was instead invested in the stock market–specifically in 403bs in Katie and Arden’s case. Mr. FW and I choose to hold mortgages on both our primary residence and our rental property because, mathematically, our money is better deployed in the stock market thanks to the average annual rate of return (7%) that you can expect after many decades of remaining invested in low-fee index funds. Essentially, money is better leveraged in the stock market than in a paid-off house.
  • If you have a low fixed interest rate mortgage, then from a mathematical standpoint, I wouldn’t pay it off early. I view holding a mortgage–and having money properly invested in diversified assets (aka low-fee index funds)–to be a much less risky decision.
  • A mortgage is an excellent hedge against inflation. Inflation is when money becomes less valuable and the neat thing about a mortgage is that it’s denominated in the dollars you originally paid for the house and so, over time, as inflation increases (which generally happens), the money you’re using to pay off your mortgage is “cheaper.” Essentially, it’s not bad to hold a mortgage and it’s actually a fine component of a diversified portfolio of assets. Paying off your mortgage to the detriment of investing is a lot like putting all of your eggs in one basket.
  • It’s not that it’s a bad thing to pay off a house–it’s just that it comes at the expense of other opportunities to grow wealth. Many of us who are early retired/financially independent choose to hold mortgages–even though we could afford to pay them off tomorrow–for the above reasons. Bottom line: financial independence can happen with a mortgage; but it absolutely cannot happen without cash on hand.

I want to make a note about the 529 for their future children as well. I’ll tell them what I tell everyone: you can take out loans to pay for college, but you cannot take out loans to fund your retirement. It’s very much a “put your own oxygen mask on first” type of situation. Parents need to ensure their own retirement is solid before starting to save for their kids’ higher education. If Katie and Arden have more discretionary money in the future, setting up 529s or other savings vehicles for their future kids could be wise. 529s can be a good idea as contributions are sometimes tax advantaged (you don’t get a federal tax deduction, just a state tax deduction in some states), but this is really dependent upon your income tax rate and the laws governing your state. When the time comes, Katie and Arden should certainly do more research into 529s and decide if that might be right for them.

Overall Asset Allocation

I’ve dug into a lot of specifics thus far and I want to close with a broader view of Katie and Arden’s finances. We’ve already noted that re-starting 403b contributions should be a top goal for them. Equally important is to build up an emergency fund.

Build an Emergency Fund

Katie and Arden

Without an emergency fund to handle the unforeseen–but entirely predictable–“emergencies” of life, such as a car breakdown, a roof repair, or a job loss, you’re at constant risk of sliding even further into debt. An emergency fund serves as your buffer against financial catastrophe and is a mandatory part of everyone’s finances. Yes, everyone!

An emergency fund is typically three to six months’ worth of your expenses held in an easily accessible checking or savings account. At their current rate of spending, that would be $25,403 to $50,806.80. However, if Katie and Arden are able to decrease their monthly spending through one of the scenarios I projected above, they can save up a smaller  emergency fund. The less you spend, the less you need to save.

Once they have this emergency fund built up, they’ll need to keep it that way. It’s not to be spent on birthdays or Christmas or dinners out. It’s there in case of a true financial emergency and, if utilized, should be replenished with the next paycheck.

Obliterate Debt

Katie and Arden have two piddly debts hanging around their necks and I recommend they wipe them out next month by utilizing some of the savings ideas outlined above. In particular, the $500 in credit card debt at a 18.24% interest rate MUST GO.

No More Credit Cards

Katie noted that they don’t want to have credit card debt ever again and also that credit cards are sometimes tough for them to manage. In light of this, I recommend doing away with using credit cards entirely. The easiest way to avoid credit card debt is to not have any credit cards

A few other notes:

  • If Katie and Arden haven’t met with an attorney to create a will and estate plan, they should do so soon. Mr. FW and I did this last year and it delivers great peace of mind to know that your affairs are sorted.
  • I’d advise Katie to stop pursuing degrees and certificate programs. She is imminently qualified and I think she and Arden can better use that money elsewhere.
  • An idea I had to help reduce expenses while traveling: house swapping! I know next to nothing about this, but it occurs to me that perhaps they could swap houses and save while venturing to exotic locations.
  • Once they have a solid emergency fund established and have set up their 403b contributions, Katie and Arden might consider purchasing another rental property that Arden can fix up. Katie noted that they might like to do this in the future and, since they have a proven track record as landlords and Arden is extremely handy, this might be a good investment for them.
  • Another option would be to put extra money into taxable investments (i.e. low-fee index funds), but if they decide to do this, they’ve got to commit to NOT liquidating it and spending it. One of the ways to ensure longterm financial success is to orient your investments to play to your strengths and not prey on your weaknesses.

Summary:

All in all, Katie and Arden are in wonderful shape. They have multiple options available to them and they have the salaries to make a number of different lifestyle scenarios pan out. Here’s my quick summary of what I would do if I were them:

  1. Begin 403b contributions
  2. Reduce monthly expenses
  3. Test out living on Arden’s base salary to explore the viability of Katie quitting her job
  4. Build up an emergency fund
  5. Consider another rental property or taxable investments for added diversification down the road
  6. Enjoy life!

Ok Frugalwoods nation, what advice would you give to Katie? She and I will both reply to comments, so please feel free to ask any clarifying questions!

Would you like your own case study to appear here on Frugalwoods? Email me (mrs@frugalwoods.com) your brief story and we’ll talk.

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