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Reality Check Single mom struggles to salvage her savings Meg is on her own and wants to start over financially. She's got a teaching job, but will she be able to fund her retirement and her son's education? By Melanie J. Mavrides How do you rebound financially after years of being a single parent? For many women like 48-year-old Meg, it's especially hard. In 1991, Meg found herself divorced, broke and out of the work force after taking a hiatus from a teaching career to be a stay-at-home mom. Her ex-husband disappeared after a custody battle over their son and he never paid child support. To cut expenses, Meg operated in "survival mode," she says. At first, she moved in with her mother. Then she became an apartment manager to reduce her rent while she cobbled together a living by substitute teaching. Before and after her divorce, Meg even cashed in about $40,000 in retirement monies that she had accumulated in a teachers' pension fund. So she was on her own with no savings. Starting over isn't easy. But things are definitely looking brighter for Meg. Last year, she landed a full-time teaching job with the Los Angeles Unified School District. Now she wonders: How can a sole breadwinner on a teacher's salary resurrect her goals of paying for her son's eventual college education and her own retirement? She has no savings or investments. We asked certified financial planner Josh Yager, who is based in Santa Barbara, Calif., to counsel Meg on how she can build up her net worth and meet her life goals. Name: Meg, 48. City: Resident of South Bay area of California. Occupation: Full-time elementary school teacher. Salary: About $38,000 a year. She expects a pay increase of about $10,000 in the next year or so. Assets: A 1986 Volkswagen Jetta. Meg was in a car accident and is expecting a cash settlement that could be valued at $10,000 to $20,000. Liabilities: Meg owes $800 on a Visa card that carries a 13% annual rate; a second Visa card has a zero balance. She makes an annual charitable contribution of about 20% of her teacher's salary to her church. Meg says she keeps a strict budget and lives relatively within her means, renting a two-bedroom apartment for $600 a month. Adviser's recommendations: Starting a new saving and investing strategy means taking on a new attitude toward money, Yager says. At Meg's salary level, she must be selective about the things she buys. Simple things, like eating out, can put a dent in her savings if she overdoes it. "Everything's a tradeoff," Yager says. "Meg talked about wanting to go on vacation with her son. If she does, she'll be voting for relaxation and quality of experience," he explains. But she'll also be "voting against college funding." In other words, financial decisions that Meg makes on a regular basis come with costs and implications, he says. Living within her means has been a necessity in the past several years of single parenting, Meg says. But she says she appreciates Yager's advice to watch where the money goes. "Josh's advice really makes me think. I'm trying not to be as frivolous. I watch the electric and phone bills more closely. I'm also driving more carefully so I don't get a traffic ticket. I pay off my Visa card every month and don't carry a balance (on one of the cards). I've scaled down as much as possible and am doing what I can to save." | |||
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Paying for her son's college bills As many parents do, Meg dreams of sending her 12-year-old son, Joseph, off to college one day. To make the goal a reality, she could start a Unified Gift for Minors Account (UGMA), with an investment frame of eight years, Yager says. Meg says she thinks she can save $400 a month for the minor's account. The UGMA has several tax benefits, especially when a child turns 14 and the entire savings account is taxed at a child's rate. (For now, the first $1,400 that Meg saves for Joseph is taxed at the child's rate; the rest of the savings is taxed at Meg's rate of about 15%.) Parents remain in control of the UGMA until the child turns age 18 or 21, depending on the state in which they reside. Meg says she'll consider this option, but has reservations. "My son will have access to a large sum of money when he's 18? I'll consider it, but I'm not sure it's a responsible choice." Yager recommends opening an account with Vanguard mutual funds and investing in the following funds:
"It's definitely realistic and the letter is a great idea," Meg says. | |||
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Retiring comfortably, thanks to California Like many states, California has set up a retirement pension fund for its teachers. Called the State Teachers Retirement System (STRS), this "defined benefit plan or pension plan" is similar to a 401(k) plan: The state matches each dollar an employee saves, and it's tax-deferred. (California's fund is now valued at $95 billion and is invested in stocks, bonds and real estate. It's the third-largest of its type in the nation, a state official says.) STRS is different, however, from the usual employer-sponsored 401(k) plan. It's mandatory, for starters, and about 8% of Meg's yearly salary is taken out of her paycheck automatically and invested in the plan. So the longer a teacher's tenure, the bigger his or her pension. During the lean financial years before and after her divorce, Meg withdrew much of the $40,000 she had accumulated after working for about 14 years in the California school system. Yager recommends that Meg look into "buying back" several of those years. Meg could redeposit the money she had previously withdrawn into the fund and invest it, tax-deferred, according to a state official. "She'll have to pay principal plus interest (to buy back years)," a state official says. "And she can choose whatever (incremental) payment plan she wants. The money could be taken from her payroll, for example." While buying back into the state's pension system sounds like a good deal, Yager says he would like Meg to save even more for her retirement. For example, if she gets a raise, she could take the money and invest it in a tax-sheltered annuity (TSA), he says. "A TSA would augment the 8% mandatory savings plan she's already involved in. The annuity would be better invested for her shorter time horizon and it's usually more aggressive," he says. "Meg knows plenty of teachers who have depended upon the state for retirement benefits and who have retired nicely. But that may be optimistic and she needs to save more," he says. Stop 'throwing money away on rent' Meg, who is currently paying $600 a month in rent, would serve her future a lot better if she bought her own place. A condominium valued at $100,000 is her best bet, Yager says. Based on her salary and credit history, Yager is confident she could qualify for a $760 a month mortgage payment with a down payment of 10%. "She needs to build equity," Yager says. Meg agrees, but says she won't be ready to move until Joseph is in high school in a couple of years. "I don't want him to change schools right now." Last January, California passed a state law to provide home loans to teachers. When she's ready to buy, Meg may be able to avail herself of this program. "Teachers can borrow the 5% down payment from their retirement account and get a mortgage," a state official says. | |||
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Reducing debt on her Visa One of Meg's Visa cards has an $800 balance, and it carries a hefty 13% annual rate. Yager said he was impressed that Meg is paying off the balance and she should continue to do so. Keeping her credit record clean will also help her get a home loan someday, he says. Don't get a second job Friends have suggested that Meg get a second job to build up her Social Security benefits. Yager disagrees: "Every individual is responsible for his own retirement. If the federal government has the (Social Security) funds to pay baby boomers, great. But if it doesn't, you don't want to be counting on it." Last October, Meg was rear-ended in a car accident. She is waiting for an accident settlement that could yield about $20,000 for her, Yager says. That money could provide a cushion, an emergency fund or a down payment on a condo. Follow-up: Meg is checking with state officials to determine how many years she could realistically "buy back" into the state's pension fund for teachers. She's also looking into other investment vehicles including Individual Retirement Accounts or a TSA as another way of investing for her retirement. She hasn't sent out the letter concerning Joseph's UGMA fund, but intends to do so soon. "I've got three people in mind," she says. | |||
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W E B S I T E Mercer Global Advisors |
About the adviser
Since 1992, Josh Yager has been a certified financial planner and consultant with Mercer Global Advisors, a fee-only advisory firm in Santa Barbara. He specializes in estate planning and portfolio design. His clients are physicians and dentists whose net worths range from $1 million to $10 million. He is also a member of the International Association of Financial Planners and the Institute for Certified Financial Planners. In addition to being a financial adviser, he is a licensed security broker and a life and disability insurance agent.
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