Debbie and her husband Dan have been married for 32 years and are planning for retirement. At this point, they’re trying to decide if they should sell their current home. The pros and cons look equally matched, so let’s help them out with this choice today!
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.
Case Studies are updated by participants (at the end of the post) several months after the Case is featured. You all requested an easier way to track Case Study updates and I have heard your pleas :)! I’ve created this page, which lists and links to all of the updated Case Studies.
I probably don’t need to say the following because you folks 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 Debbie, this month’s Case Study subject, take it from here!
Hello Frugalwoods & Readers: My name is Debbie, I’m 54, and my husband Dan is 56. We’ve been married for 32 wonderful years and have two daughters, ages 31 and 27, and four grandchildren with another on the way! Dan and I live in Pure Michigan in the northern part of southeast Michigan. Our home backs up to an Equestrian Center so we get an amazing view of these beautiful animals. I LOVE it when the horses run!
Dan and I both work about 35 miles away from home… imagine that! Twice a week we carpool to work to save money and wear and tear on our vehicles. Dan is a Software Development Manager for an insurance company and enjoys his job. I work part-time for a national hospital chain in the radiology department doing office/clerical work. Working part-time allows me to spend time with my four grandchildren and help my daughters out from time to time.
Dan & Debbie’s Hobbies
Dan has a lot of hobbies, including: golf, biking, photography and music. He has also spent a LOT of time doing DIY projects around the house, which has saved us a ton of money. His most recent project was building a deck and we love it!
I enjoy reading, sewing, cooking, and bargain hunting (I love resale shopping!). I’ve come into the arena of DIY make-up, soaps, lotions, and more. I find it very fun to make my own and love saving money on these things. Physical hobbies have been challenging for me since I’ve had four back surgeries with some nerve damage. Due to this, we have had lots of medical bills over the years.
Together, Dan and I love to travel. Our most recent trip was going up north with some great friends on a “paddle for pints” kayaking tour which took 5 hours. We loved it and it was my first time in a kayak! We’ve also been on several cruises, and recently visited Sedona, AZ and the Grand Canyon. It was amazing!!! We typically use Air B&B for our lodging so that we can prepare some meals there, rather than eat all meals at restaurants.
Dan & Debbie’s Early Years Together
Dan and I met at our church and were married in 1987. About 10 months later, our first daughter was born. These early years were tough financially. Dan and I were both working and paying for daycare was a challenge. We were fortunate to get a down payment together, with help from Dan’s father, and purchased our first home.
As our salaries increased, we were able to work on the house to make improvements. We moved to another home after making a nice profit from all the work we put into our first home. During that time, our second daughter was born. We made several moves over the years, each time doing many renovations, selling for a profit and moving up. This is how we got to where we are today with very little left on our mortgage.
Over all these years, we were never overly focused on saving everything we could for retirement. Daily living seemed to always get in the way and helping to pay for college and weddings for our kids took a toll. Over the last 10 years, we’ve become much more focused on saving for retirement and trying to change our lifestyle. This is due a lot to following the Frugalwoods, Mr. Money Mustache, and others. We wish we could go back to the beginning with the knowledge we have today as we would have done it much differently.
Looking To The Future
We would love to retire in 8-10 years (or maybe even 6-7 years). Our dream is to have the ability to live in Michigan in the summer/fall, and somewhere warmer in the winter months. We DO NOT LIKE the snow! Dan is currently maxing out his 401K ($19k/year), which comes to around $35K a year including his employer’s contributions.
Should We Move?
Since both of our jobs are 35 miles from our home (and only about 1.5 miles apart), we’re considering purchasing a home closer to our jobs. Most of our family lives in the area around our jobs as well (except for one of our daughters) and so, proximity to them would be wonderful as well. The major downside of our current lifestyle is the distance to everything from where we currently live. Most of our family lives about an hour away and so we feel like we have to travel a long distance to go to any family function. It wouldn’t be such a problem if we didn’t drive to work every day as well. It’s a lot of driving!
However, the cost of homes has gone up tremendously in this area and it seems to be a seller’s market right now. There aren’t that many homes to choose from and we are picky, picky, picky! We did come across a home last year that we both loved that had just about everything we’re looking for. But the house was on the market for a total of two days. We bid on the house, along with dozens of others and offered $20K OVER the asking price and… we didn’t even come close. It was the only time I’ve ever seen a line of cars down the street waiting to walk through a house, it was wild!
At this point in the game, with retirement edging closer, we’re unsure if we want to buy a home in our work area which will cost more money than our current home (which is $34K away from being paid off). We’ve revisited this subject over and over… and over… and we still don’t have a clear sense of what to do. We don’t want to have a mortgage when we’re retired.
We do have money in a savings account that we’d planned on using for a down payment on a house if we were to take the leap! We would very much enjoy having a short commute to work and there would be a great time savings, but at the same time we very much enjoy living in our current area. We do spend quite a bit of money grabbing food on the way home due to our long commute. Given this, we eat out more than we should!
Dan & Debbie’s Current Home
There are some things about our current house that we don’t like and that aren’t (easily) fixable. Our driveway is steep, which makes for a challenge in the winter time with snow shoveling. The layout of our house isn’t ideal for entertaining as there’s not a large gathering area near the kitchen… which sometimes makes us want to move! Outside of entertaining family and friends, the house works fine for us. We’ve looked at making the structural changes to our house that we would like, but it’s cost prohibitive. At the same time, we have the house completely redone the way we like and we’ve replaced just about everything, which makes it hard to move because we don’t want to do all that again!!
When we bought our current house, we bought it far, far below market value and it was a blessing financially. At that time, Dan took a new job that was only 15 miles away. Since then, that company went bankrupt and was bought out. Thus, we find ourselves living much farther from work than we’d intended.
If we were to sell it, we think we could realistically get $290K – $300K. However given the demand on homes at the present time it might fetch more. We owe approximately $34,700 on our mortgage.
Where Debbie and Dan Want to Be In Ten Years
In ten years, we’d like to be retired and living in a warmer climate during the winter months. We don’t need a fancy house, just something clean, neat and comfortable. I do enjoy hosting family and friends at my home, so the house would have to accommodate those needs for entertaining. We would also like to do some traveling in our retirement years.
Debbie and Dan’s Finances
|Dan’s net income||$6,239||Dan’s net salary after taxes, healthcare, dental, FSA, and 401K contributions|
|Debbie’s net income||$952||Debbie’s net salary after taxes, dental, and 401K contributions|
|Dan’s yearly bonus||$333||Yearly bonus broken out per month. Net after taxes and 401k|
|Groceries and household supplies||$790||Lots of organic, includes beverages, toilet paper, cleaning supplies, etc.|
|Mortgage Payment||$536||15-year, fixed rate of 3.5%. We have $34,700 left to pay on it.|
|Travel / Vacations||$415|
|Cash Allowance||$400||Cash on hand for personal expenses|
|Car Payment||$384||For our 2018 Subaru Outback. This is a 4 year loan and we have 3 years left. 0% interest rate.|
|Car Lease||$316||For a 2017 Buick Encore. 19 months remaining on this lease. We will NOT be leasing a car ever again. The plan is to buy a used Subaru Forrester when this lease ends.|
|General Merchandise||$290||Everyday expenses that are not food-related, kind of a catch all|
|Home Maintenance / Improvements||$210|
|Utilities||$177||Gas & Electric. This is the average amount per month as it varies throughout the year.|
|Medical / Healthcare||$125|
|Subscription services||$68||Netflix, Hulu Live, Amazon Prime|
|Entertainment||$50||Shows, sporting events|
|Homeowners Association Dues||$34|
|Cell phones||$10||Through T-Mobile. The total cost is $60 for the two of us, but Dan’s employer reimburses him $50 per month.|
|Car loan for our 2018 Subaru Outback||$14,214||Monthly payment of $384.16. This is a 4 year loan and we have 3 years left. 0% interest rate.|
|Car lease for a 2017 Buick Encore||$6,010||Monthly payment of $316.33 with 19 months remaining on this lease. We will NOT be leasing a car ever again. The plan is to buy a used Subaru Forrester when this lease ends.|
|Dan’s roll-over IRA||$253,360||Through Vanguard|
|Dan’s 401K||$98,389||Through Vanguard|
|Savings accounts||$94,670||Through our credit union. Interest rate of .05%|
|Checking accounts||$21,081||Through our credit union. Interest rate of .15%|
|Debbie’s 401K||$8,305||Through Transamerica|
Debbie’s Questions For You:
- Should we move or should we stay?
- If we move, we’re most likely looking at $50K – $75K more for a house comparable to ours and in the same excellent condition. Dan is done remodeling homes.
- The area we work in is more expensive and the homes are in higher demand.
- If we were to sell our current home, we think we could realistically get $290K – $300K. However given the demand on homes at present, it might fetch more.
- Are we being unrealistic to want to retire in approximately 8 years with our current financial situation?
- What should we do with the sizable amount of money sitting in our bank account? We could pay off our mortgage with it, but we’re hanging onto this cash in case we move and need it for our downpayment, etc.
Mrs. Frugalwoods’ Recommendations
I have a lot of admiration for Debbie and Dan. They’ve done an excellent job of righting their financial ship in the last ten years. Their hard work to stay (mostly) out of debt, their aggressive uptick in retirement savings, as well as their nearly paid-off house are all perfect examples of how it’s possible to put yourself on solid financial footing at almost any stage of life. Many congratulations to Debbie and Dan! Let’s dive right into the most pressing question today: to move or not to move.
Debbie’s Question #1: Should we move or should we stay?
While there’s a lot to consider here, I think it can be boiled down to a simple calculation: If Debbie and Dan can move closer to work/family and DECREASE their housing expenses, then I think they should do it. However, if moving would entail increasing their housing costs, I don’t see much upside. Beyond this calculation, here are the factors I encourage them to explore:
1) How important is being mortgage free?
Debbie said they’d like to be mortgage-free in retirement and the best way to accomplish that would be to stay where they are. With only $34K remaining on their mortgage, they could afford to pay it off today (we’ll discuss this further in a moment).
2) Where in Michigan do Debbie and Dan want to live after they’re retired?
Proximity to work won’t matter anymore, but proximity to family might. On the other hand, they love their current home and have updated it to their specifications. However, if it will wear on them to drive so far to visit family as they age, then making a move now might be wise. Additionally, I recommend they consider if their current home is well-suited for aging in place. For example, is there a main floor bedroom? Are there lots of steps up to the house? Is there a lot of outdoor maintenance required?
3) Are they willing to work for a few more years in order to afford a home closer to work/family? I
f the main drawback of work is the commute and, if they eliminated the commute, would it be worth it to them to extend their retirement horizon in order to work a few more years (and save that money)?
4) What is the plan for this property during the winter months once they’re retired?
Since Debbie and Dan ultimately want to spend only the summer months in Michigan, what’s their plan for making that dream financially tenable? If they pay off their current home, that would make the carrying costs much lower (they’d only be paying taxes, insurance, home owner’s association dues, and maintenance/upkeep). However, even with a paid-off mortgage, it’s still a bit tough financially to have a home sitting empty for long periods of time–costing you money, but not making you any money–especially in a climate as harsh as Michigan’s with all the attendant wintertime travails of freezing pipes, etc.
This makes me wonder if a small condo near work/family would be a better option for their long-term retirement plans.
Here’s my thinking:
- A condo usually has less of everything: less space, less upkeep, less hassle, and less expense.
- Debbie mentioned an interest in entertaining family, but, if all of their family members live nearby and aren’t spending the night, I wonder if Dan and Debbie could manage with an inexpensive one-bedroom that has an open floor plan conducive to hosting family gatherings?
- Plus, if they live close to family, I imagine it would be easier to ask them to pop over and check on the property periodically during the winter months when Dan and Debbie are away.
- A condo could be logistically easier to leave sitting empty for long periods of time during the winter since there’s no outdoor maintenance required.
- Assuming it’s a small, one-story condo, the absence of stairs could make it ideal for aging in place (less to clean, less to fix, less walking required).
- If the area near their work/family is in high demand, I wonder if there’d be an opportunity to rent the condo out during the winter months when they’re away (either through AirBnB or with a short-term lease). This, however, is a major maybe and I wouldn’t bank on rental income in order to make the finances work. In other words, don’t overspend in the hopes that rental income will rectify the balance sheet. Better to underspend and be pleasantly surprised by rental income.
If there are cheaper condos/townhouses available, and if Debbie and Dan are interested in seriously downsizing, and/or if it would be a worthwhile trade-off to work a few extra years in order to offset the costs of moving, then I think it could potentially be a great idea. I think the bottom line of what not to do at this stage in their lives is to increase their housing costs (without a plan to work longer in order to afford it).
Debbie’s Question #2: Are we being unrealistic to want to retire in approximately 8 years with our current financial situation?
My answer to this question depends on:
- Whether or not Debbie and Dan decide to move and, if they do move, what their new housing costs are (minus any money they make selling their current home).
- What Debbie and Dan are envisioning for their future winters in the south.
- What they can expect to receive from Social Security.
- How much they plan to save into their 401Ks during their remaining working years.
Winters In The South
We addressed the moving question in the above section, so let’s move onto the second consideration regarding winters in the south. I’m not sure if Debbie and Dan are thinking of renting or buying a second home, but either way, they’ll need cash flow, which again supports the idea of either reducing or maintaining their Michigan housing expenses. Finding a way to rent out their homes when they’re not living in them could be one way to make the carrying costs more tenable, but finding renters and managing a property isn’t easy and isn’t always profitable.
That idea would depend on the market, the area, and the demand for short-term rentals. Since there are too many unknown variables here, I won’t offer concrete advice, I’ll just reiterate that the way to make this happen will be to keep their Michigan housing costs as minimal as possible.
Since Debbie and Dan are nearing retirement, it’s a good idea for them to determine what they can expect to receive from Social Security. To figure this out, Debbie and Dan can follow these instructions on how to retrieve their earnings tables from ssa.gov (the government Social Security website).
Debbie and Dan’s 401Ks and IRA
Congratulations to Debbie and Dan for prioritizing saving into their 401Ks during the last ten years! They’ve made great strides and put away a large chuck of change. Kudos!!!!
401Ks (employer sponsored retirement accounts):
- Dan’s 401k is currently at $98,389 and Debbie’s is at $8,305, for a combined total of $106,694.
- If Dan and Debbie both max out contributions to their 401Ks (the 2019 annual max, per the IRS, is $19,000) for the next eight years, they’d have an additional $304,000 in these accounts (not counting employer contributions and assuming the annual allowable max doesn’t increase).
- That’d be a total of $410,694 (which, again, would be higher due to employer contributions and a potential increase in the max amount allowed by the IRS).
- At present, Dan is maxing out his 401k ($19K per year), but Debbie is not. If she’s able to contribute more to her 401k, that’ll set them on very secure footing in eight years. At the very least, Debbie should contribute enough to her 401K to qualify for her employer’s match.
- More about 401Ks here.
- Edited to add: many astute readers pointed out that since Dan and Debbie are over age 50, they’re eligible for the IRS catch-up contribution limit to their 401ks, which I totally neglected to mention! Whoops. This is an additional $6,000 per person per year, which means they’re each eligible to contribute $25K to their 401ks.
- Debbie and Dan also have an IRA of $253,360.
- An IRA is a retirement account that’s pre-tax. This means you don’t pay taxes on money you put into an IRA, but you do pay taxes when you withdraw the money in retirement. In general, an IRA is a good idea if you’re trying to reduce your current tax bill (and if you think your future tax rate will be lower). This logic should play out well for Debbie and Dan because, once they’re retired, their income will be much lower than it is right now and thus, they’ll pay less in taxes on their IRA disbursements.
- More about traditional IRAs here.
For both IRAs and 401ks, you need to be age 59.5 before you can withdraw money penalty-free (although there are exceptions). Dan is currently 56 and Debbie is 54. Given this, they’ll both be over the age 59.5 requirement before they retire and begin pulling money from their 401ks and IRA.
If they let their IRA sit tight, and both max out their 401ks for the next eight years, they’d be conservatively looking at a retirement nest egg of $664,054 ($410,694 + $253,360). This is not a precise number as it doesn’t account for: employer contributions to their 401Ks, market fluctuations, inflation, and potential changes in the IRS maximum allowable 401K contributions. Despite the imperfection of this number, it still gives Dan and Debbie a general sense of what they could have if they upped their 401K contributions for the next 8 years.
Once Debbie and Dan determine their expected Social Security payments (following the above steps), they can add those totals to their IRA + 401k total. I don’t know what their employer matches are for their 401ks, but they should add those figures in as well. With their Social Security totals–and a decision on how much they’ll each contribute to their 401ks for the next eight years–they should have a fairly realistic picture of what they can expect to have in retirement.
Debbie’s Question #3: What should we do with the sizable amount of money sitting in our bank account? We could pay off our mortgage with it, but we’re hanging onto this cash in case we move and need it for our downpayment, etc.
As Debbie and Dan already know, the answer to this question is predicated on their decision about whether or not to move. They have $115,751 in their checking and savings accounts and Debbie is right, that’s a lot of cash to keep liquid (and not invested).
Debbie’s correct that, if they want to move, this money could all get sucked up into their downpayment, closing costs, and moving expenses. However, as we discussed above, if they’re able to find a much smaller and much, much less expensive condo, they could use a smaller portion of this cash in service of their downpayment, or, potentially even buy a home outright without a mortgage.
If they decide not to move, they could go ahead and pay off their mortgage of $34,700, which would leave them with $81,051 ($115,751 – $34,700). They should then keep around $34,332 in their savings account as their emergency fund (that’s six months worth of their current monthly spending of $5,722). Then, they’d have $46,719 ($81,051 – $34,332) remaining. A great problem to have!!!
I recommend they consider doing the following with this money:
- Earmark some of it to purchase the used Subaru Forrester they plan to buy when their car lease ends. I’m thrilled to hear they don’t plan to buy another new car or lease another car (more here on why I encourage buying used cars). Let’s ballpark $15k for this car.
- Now we’re down to $31,719 ($46,719 – $15,000) and Dan and Debbie have a paid-off house, a paid-off car, and a healthy emergency fund! What to do next?
- If they want to, they could pay off their 2018 Subaru Outback loan but, since it’s at 0%, there’s no imperative to do so UNLESS that interest rate changes at some point. If the interest rate stays flat at 0%, there’s no financial reason to pay it off early unless they want to. If they did pay it off, they’d be left with $17,505 ($31,719 – $14,214).
- Then, since they’re already contributing to their 401ks, I’d say that $17,505 looks like the start of saving for their plan to winter in the south. Whether they keep this amount in cash or invest it depends on their risk tolerance. Since I’m guessing they’d envision using this money in 8 years (their projected retirement date), it’s kind of a toss-up on time horizon. Some folks would invest this money in the stock market, others would keep it in cash. It’s really depends on their risk tolerance and what they’re comfortable with.
- If Dan and Debbie decide to invest this money, they should likely consider more conservative options, since their time horizon for investing is relatively short. For more information on investing, I recommend the book The Simple Path to Wealth: Your Road Map to Financial Independence And a Rich, Free Life, by: JL Collins (affiliate link).
- At the very least, if they do nothing else, Debbie and Dan should move their cash into a savings/checking account with a higher interest rate. Ally Bank, for example, offers a 2.1% interest rate on their savings accounts. 2.1% might not sound like a lot, but Dan and Debbie could earn $2,430.71 in interest every year (2.1% of $115,751 = $2,430.71). Yay for free money!
Savings Accounts Side Note
One of the easiest ways to optimize your money is to keep it in a high-interest savings account. With these accounts, interest works in YOUR favor (as opposed to the interest rates on debt, which work against you). Having money in a no (or low) interest savings account is a waste of resources because your money is sitting there doing nothing. Don’t let your money be lazy! Make it work for you! And now, enjoy some explanatory math:
- Let’s say you have $5,000 in a savings account that earns 0% interest. In a year’s time, your $5,000 will still be… $5,000.
- Let’s say you instead put that $5,000 into an American Express Personal Savings account that–as of this writing–earns 1.70% in interest. In one year, your $5,000 will have increased to $5,085.67. That means you earned $85.67 just by having your money in a high-interest account.
And you didn’t have to do anything! I’m a big fan of earning money while doing nothing. I mean, is anybody not a fan of that? Apparently so, because anyone who uses a low (or no) interest savings account is NOT making money while doing nothing. Don’t be that person. Be the person who earns money while sleeping. Rack up the interest and prosper. More about high-interest savings accounts, as well as the ones I recommend, here: The Best High Interest Rate Online Savings Accounts.
Debbie and Dan’s Expenses
In Frugalwoods Case Study tradition, it’s time to take a look at Dan and Debbie’s monthly spending. In every Case Study, I point out that what you choose to 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 savings rate will help you to achieve your long-term goals. 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 long-term financial plan, I encourage you to take my free 31-day Uber Frugal Month Challenge.
Whether or not Dan and Debbie choose to reduce their spending depends on:
- If they want to move closer to work/family and want to be mortgage-free when they retire.
- If they want to retire in eight years.
- If they hope to purchase a second home in the south.
If Dan and Debbie want to do all three of these things, reducing their monthly spending will help and may very well be mandatory. At present, they don’t have the cash on hand to do all three. The great news is that they’re high earners and could stash away a significant amount of money in the next eight years.
In the spreadsheet below, I’ve identified areas of discretionary spending in order to illustrate how much they could save:
|Item||Current Amount||Mrs. FW’s Notes||Proposed New Amount||Amount Saved|
|Groceries and household supplies||$790||This could likely be reduced although, if they decrease their other food spending, they might find that this category remains static.||$700||$90|
|Mortgage Payment||$536||Fixed expense; no change||$536||$0|
|Travel / Vacations||$415||Dan and Debbie will need to decide if this expense is more important to them at this point OR if they want to prioritize their ability to retire in eight years, move, and/or buy a house in the south for the winters. This is the time for them to make these tough choices and decide how they want their future to look.||$0||$415|
|Cash Allowance||$400||Coupled with the “household supplies,” “general merchandise,” and “personal care” line items, there’s a good amount of money being spent in these related categories.
I suggest they examine what they’re buying in each of these areas and find opportunities for efficiencies and savings.
|Car Payment||$384||Fixed expense; no change||$384||$0|
|Car Lease||$316||Fixed expense; no change||$316||$0|
|Charitable Giving||$300||Fixed expense; no change||$300||$0|
|General Merchandise||$290||Coupled with the “household supplies,” “cash allowance,” and “personal care” line items, there’s a good amount of money being spent in these related categories.
I suggest they examine what they’re buying in each of these areas and find opportunities for efficiencies and savings.
|Restaurants||$270||Dan and Debbie will need to decide if this expense is more important to them at this point OR if they want to prioritize their ability to retire in eight years, move, and/or buy a house in the south for the winters. This is the time for them to make these tough choices and decide how they want their future to look.||$0||$270|
|Car expenses||$266||Fixed expense; no change||$266||$0|
|Property Taxes||$250||Fixed expense; no change|
|Clothing||$250||Dan and Debbie will need to decide if this expense is more important to them at this point OR if they want to prioritize their ability to retire in eight years, move, and/or buy a house in the south for the winters. This is the time for them to make these tough choices and decide how they want their future to look.||$0||$250|
|Home Maintenance / Improvements||$210||Seems a bit high if they’re finished improving their current home; but then again, there are always expenses when you’re a homeowner.||$210||$0|
|Utilities||$177||Fixed expense; no change||$177||$0|
|Auto Insurance||$176||I recommend they shop this around and see if they can find a lower rate.||$100||$76|
|Medical / Healthcare||$125||Fixed expense; no change||$125||$0|
|Home Insurance||$73||Fixed expense; no change||$73||$0|
|Internet||$66||Fixed expense; no change||$66||$0|
|Personal Care||$56||Coupled with the “household supplies,” “cash allowance,” and “general merchandise” line items, there’s a good amount of money being spent in these related categories.
I suggest they examine what they’re buying in each of these areas and find opportunities for efficiencies and savings.
|Homeowners Association Dues||$34||Fixed expense; no change||$34||$0|
|Cell phones||$10||This is super duper low right now since Dan’s employer is paying for $50 of their bill. Once he retires, I suggest they look into changing over to a cheap MVNO.||$10||$0|
|Costco Membership||$9||No change||$9||$0|
|Current monthly subtotal:||$5,722||Proposed new monthly subtotal:||$3,553||$1,919|
|Current annual total:||$68,664.00||Proposed new annual total:||$42,636||$23,028|
I will send Debbie this spreadsheet so that she and Dan can tinker with the “proposed new amount” column to determine what different rates of savings in each category would net. If they decide to go super frugal and make all of the above cuts, they’ll be on track to save an additional $23,028 each year. At present, Dan and Debbie save $1,802 per month ($21,624 per year). If they enacted these additional savings, they’d put away $44,652 a year.
Then, if they decide to pay off their mortgage, pay off their cars–and buy a used car in cash–they’d reduce their monthly spending by another $1,237, which would yield an additional $14,844 in annual savings.
Combined, my proposed savings, their current savings, and the elimination of their mortgage and car payments would enable Dan and Debbie to save $59,496 per year. Multiplied by the eight years they plan to work until retirement equals a staggering $475,968! Just in cash savings!!!
This doesn’t even account for their retirement savings or their other saved cash. At this level of savings, it seems Dan and Debbie could afford to: retire in eight years and purchase a second home in the south for their wintertime enjoyment. Note that this plan depends on them being mortgage-free on their Michigan home, but they can adjust the figures to account for a Michigan mortgage if they’d like.
Making Transformational Financial Changes At Any Age
I often hear from readers in their 50’s and 60’s who think they don’t have the time to make significant changes to their finances. But often, that’s not the case. I think Dan and Debbie are a great example of the phenomenal changes that are possible as you near retirement. It reminds of me of the proverb, “The best time to plant a tree was 20 years ago. The second best time is now.”
When you calculate your potential savings on an annual basis, you begin to understand the root of frugality: The less you spend and the more you save, the earlier and the easier it is to do what you want with your time.
So, sure, saving $10 here and $50 there might not seem transformational until you couple those savings with other savings and multiply by months and years. And while 20 years ago might’ve been the best time to start, there’s so much opportunity in whatever your present moment is. One of the reasons I love to highlight reducing spending is that you’re not dependent on the stock market or other investments or other people in order to see dividends. You can start saving more money right now and see the benefits almost immediately. Particularly for folks who aren’t yet retired–treat your final working years as your chance to bank as much of your salary as possible in order to create the retirement you’ve dreamed of. Don’t dwell on what you did or didn’t do in the past, focus on what you can do right now and going forward.
Credit Card Strategy
Debbie didn’t mention if she and Dan use credit cards, but, if they’re confident in their ability to pay them off in full every month, it could be an excellent way to accrue rewards points, especially travel rewards (affiliate link). Since Debbie noted that traveling more is a goal for them, I recommend they start researching travel rewards cards now and figure out a strategy for building up points and rewards to allow them to travel for less when they’re retired. More on how to create a credit card strategy here.
Congrats again to Debbie and Dan for being in such great financial shape as they near retirement. It’s wonderful that they’re able to consider their options and aren’t tied down by debt or limited by an absence of savings. In summary, here are the next steps I suggest they consider taking:
- Determine if they want to move:
- Where do they want their Michigan home to be during their retirement?
- Is there a smaller, less expensive condo option in their desired location that would allow them to reduce their housing expenses and potentially reduce the logistical and financial challenges of leaving a property empty during the winter months?
- Decide what they want their future “winters in the south” to look like:
- Does this entail buying a second property? If so, how much will that cost and what are the logistics of leaving it empty during the summer months?
- Calculate how to afford the carrying costs of two homes (mortgage, home owner’s association dues, taxes, insurance, maintenance, and upkeep).
- Calculate their retirement totals:
- Calculate what they can each expect to receive from Social Security.
- Determine how much they can contribute to their 401ks for their remaining working years.
- Add these numbers together and decide if this total will make it feasible for them to retire in eight years, based on the financial conclusions regarding their Michigan home and their prospective southern winter home.
- Regarding their cash:
- Move the cash into a high-yield savings account ASAP.
- Either pay off their mortgage or use the money for a downpayment.
- Earmark some of this money as their emergency fund.
- Earmark some of the money to buy a used car.
- Potentially pay off their current car loans ahead of schedule.
- Save the rest (and add to it) for their “winters in the south” plan.
- Regarding their expenses:
- Based on all of the above decisions, determine if they need to increase their savings rate in order to enable all of their retirement dreams (this includes increasing Debbie’s 401k contributions).
Ok Frugalwoods nation, what advice would you give to Debbie? 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 (email@example.com) your brief story and we’ll talk.