Budgeting for a New Home, and a Disability

The Crosbys, with son Owen, are eager to move to a bigger home. Kinzie+Riehm

Tim and Jennifer Crosby are ready to trade up from their 2,000-square-foot suburban Orlando home. They’d like more space — maybe even a pool — in a district with better schools for their son, Owen, 7.

Expected cost: $450,000.

With real estate in the area recovering, the Crosbys’ house is worth close to their 2004 purchase price of $268,000.

Between equity of more than 20% and savings, they can foot a bigger down payment; plus, they have $2,000 a month after savings and bills for higher carrying costs. (Combined, they earn $147,000 from his job as a network administrator and hers as a business analyst.) But they’d like to be sure it all pencils out.

“We want to enjoy what we have now without blowing it for later,” says Jennifer, 42.

Related: Baby on the way? Time to make a budget

They’re also dealing with a major unknown: Tim, 43, has Charcot-Marie-Tooth disease, a neurological disorder that could one day affect his mobility.

“I’d like to work into my sixties,” he says, “but don’t know what my condition will bring into play.”


Real estate value: $243,000
Retirement savings: $189,500
Cash: $80,000
Cash value of life insurance: $23,000
Stocks/other investments: $15,500
TOTAL ASSETS: $551,000

Student loan: $50,000
Mortgage: $180,000


Fix retirement first. The Crosbys save $16,000 a year for retirement. At that rate, they’ll have around $1 million in today’s dollars by their mid-sixties, estimates Jacksonville financial planner Carolyn McClanahan.

A great start, but not enough to maintain their lifestyle in the best of circumstances — and definitely not if Tim has to leave the workforce before 67. (The disability insurance he has through work will replace only 60% of his income.

McClanahan wants them to stash $8,000 more a year, preferably in Roth IRAs.

Related: Don’t let divorce wreck your finances

Downscale the dream. Figuring a 20% down payment, a 30-year mortgage on a $450,000 house adds $650 to their monthly nut, not including higher taxes, insurance, utilities, and maintenance. Adding the higher retirement contributions, along with $3,000 a year that McClanahan would like them to save for Owen’s college, the Crosbys will nearly erase their monthly surplus.

McClanahan would rather they dial back their budget to, say, $350,000, so that they can …

Speed-pay the debt. McClanahan wants the Crosbys to get a 30-year mortgage, but put their leftover funds each month toward the debt. Erasing the loan early will reduce their retirement income needs and give them leeway if Tim is forced to retire early.

Plus, it’s a “backdoor college savings plan,” she says. “If you can’t fund tuition through cash flow, you can use a HELOC to help.”

MONEY Ask the Expert

Do I Owe Taxes on Fantasy Sports Winnings?

Q: I occasionally win money playing fantasy sports. Do I owe any taxes? If I do, how can I lower them? — Erik, Saratoga Springs, N.Y.

A: You owe taxes on all your winnings, though gaming organizations aren’t required to report that income to the IRS or send you a 1099 unless your net income — your total winnings minus your entry fees — reaches $600.

The good news, says Douglas Mueller, a CPA in St. Louis, is that if you itemize deductions, you can write off any expenses or other gambling losses incurred in the same year.

Deductions can’t exceed the amount of your winnings, however. And expenses must be directly related to your gambling.

Related: Should I Take Out a 401(k) Loan to Pay Off Debt?

The cost of a book on fantasy baseball strategy might be fair game, says Mueller, but a satellite-TV subscription to NFL games is out of bounds, since the benefit to you goes far beyond research.

MONEY Ask the Expert

Should I Take Out a 401(k) Loan to Pay Off Debt?

Q: I have $7,300 in high-interest debt. Should I take out a 401(k) loan to pay it off? — Joanne, Columbus, Ga.

A: Only if you can keep saving for retirement. Yes, a 401(k) loan looks like a good deal initially since the interest you pay (now about 4% to 5%) goes into your account.

One danger, though, is that you just rack up more debt.

“Moving money around is not becoming debt-free,” says Gail Cunningham, a vice president of the National Foundation for Credit Counseling.

And if you make 401(k) loan payments in lieu of contributions, the tab can be steep.

Not only do you miss out on potential returns, but you also forgo an employer match, says Vienna, Va., financial planner Michael J. Rebibo.

Plus, saving less in your 401(k) means a higher income tax bill.

And if you quit or get laid off and can’t repay the loan within 60 days, you’ll owe a 10% early-withdrawal penalty (assuming you’re under 59½) as well as taxes.

MONEY Ask the Expert

When Do I Stop Paying Social Security Taxes?

Any earnings greater than $117,000 are not subject to Social Security taxes. Photo: Josh Randall/Shutterstock

Q: If you earn more than $117,000, do you keep paying Social Security taxes on wages above that amount? — Patrick, Houston

A: No, you don’t. The maximum amount of earnings subject to Social Security tax this year is $117,000, up from $113,700 in 2013.

Beyond the new limit, you’re done with the 6.2% Social Security tax (12.4% if you’re self-employed) for the year.

You’re not done with all wage taxes, though. You’ll owe a 1.45% Medicare tax (again, double that if you’re self-employed) on total earnings, no matter how much you make.

Quiz: Road to Wealth: Are you on track?

And there’s one more tax, points out Michael Eisenberg, a certified public accountant in Los Angeles. Starting with 2013, couples making more than $250,000 and singles earning at least $200,000 also owe a 0.9% Medicare tax on any earned income above those thresholds.

MONEY Ask the Expert

Should I Hold Stocks Longer to Lower My Taxes?

If you own a stock for more than a year and sell it, your profits are taxed as capital gains. Photo: Kathy Burns-Millyard/Shutterstock

Q: I’m selling stock to buy a home in two years. Should I spread out the sale to cut taxes? — Angie, Berkeley

A: Go ahead and sell.

Yes, you could possibly save on taxes by waiting: If you’ve owned the shares for a year or less, your profits, treated as ordinary income, would be taxed at 28% — the bracket you report you’re in.

Gains on shares held for over a year, however, would be taxed at 15%, says Stephen Horan, managing director of the CFA Institute.

Related: How to Lower Your Tax Bill

Were gains to push your adjusted gross income up a bracket, past $250,000 ($200,000 for singles), you’d be subject to an extra 3.8% tax on some of the profit — a levy you might avoid by selling the shares over two years.

Delay, though, risks a price drop.

“Trying to save a few dollars in taxes might cost you way more in investment losses,” says David Walters, a financial planner with Palisades Hudson in Portland, Ore.

Cash you need so soon should not be in the stock market.

MONEY real estate

Best Places to Retire

Love the culture and excitement of urban life, but loathe the congestion and cost? One of these ‘second cities’ could be your first-choice retirement spot.

If the thought of retiring to a sleepy beach town or country hamlet bores you silly, you’re not alone. Increasingly, retirees are “interested in urban center communities,” says John McIlwain, senior fellow at the Urban Land Institute. “They don’t want to be isolated out in the suburbs.” It’s not surprising that people want to spend their post-work years surrounded by the arts, cutting-edge health care, and diverse neighbors, but the cons of urban living (like cost) can be daunting. So we set out to find places that won’t ding your nest egg with high taxes and nosebleed prices, yet still have great attractions and plenty of your peers. Here are five affordable small cities you may one day want to call home.

  • Raleigh, N.C.

    This state capital’s thriving economy and proximity to top universities have long made it a prime relocation destination. And recently more of those new faces have had a few wrinkles: From 2000 to 2010 the city’s population of 55- to 64-year-olds shot up by 97%, according to the Brookings Institution.

    It’s not hard to see the draw: Raleigh provides a big-city feel with a low cost of living; mild, four-season weather; and, thanks to all those medical schools, world-class health care.

    Where to live

    Midtown/North Hills: Retirees looking for a good deal and a practical location should shop north of downtown, says local real estate agent Kim Crump. There you’ll find spacious townhouses starting at around $200,000.

    Downtown: Those willing to pay about twice that price may consider the new condos and lofts downtown. “It’s stimulating to be around a young and diverse population,” says Jim Belt, now 62, who retired from finance in 2006 and along with his wife, Donna, moved from London to downtown Raleigh.

    The couple say living in the center of things made it easy to get involved. Jim founded a downtown residents group. Donna, 59, started BEST Raleigh, a group that puts art in vacant storefronts.

    What to do

    Food: The city has a diverse restaurant scene, with everything from Afghan cuisine to Southern barbecue.

    The 5,000-seat Red Hat Amphitheater hosts the big acts, while the opera and symphony perform at the Duke Energy Center for the Performing Arts.

    A range of work is on display in galleries, public spaces, and parks. Or take in the 30 Rodin sculptures at the North Carolina Museum of Art.

    Education: North Carolina State University’s lifelong-learning program offers affordable courses and study trips on topics including garden ecology and classical music.


    Like most of the states in this gallery, North Carolina does not tax Social Security benefits. The state has no inheritance or estate tax.

    Income tax:

    • 5.8% flat (starting 2014)
    • Sales tax: 6.75%
    • Median property tax: $1,800


  • Pittsburgh

    Talk about a comeback. At the turn of the 20th century Pittsburgh was an economic and cultural hub, home to Andrew Carnegie and other captains of industry. Then came deindustrialization and job losses in the 1980s. Now the city is polishing its rusty image by converting old mills and factories into office space, galleries, and lofts.

    The once-dwindling population is also bouncing back; the city took the top spot in U-Haul’s 2012 relocation survey, with a 9% jump in transplants. For retirees, Pittsburgh offers a true urban experience, including good public transportation, pro sports, and a host of top universities, all at a bargain price.

    Where to live

    The Northeast and South: Jim and Deborah Bogen moved to Pittsburgh from California in 2000, when Jim, now 78, retired from the philosophy department at Pitzer College.

    During a teaching stint at the University of Pittsburgh, he fell in love with the town, its 90 eclectic neighborhoods, and the green, hilly landscape. For Deborah, the move to a more affordable city had major practical implications. “If we hadn’t come here, I’d still be working,” says Deborah, 63, who retired from her paralegal job at age 50 and now writes poetry and novels.

    Homes in popular neighborhoods like Highland Park (where the Bogens live) or the South Side are now fetching more than $300,000 or so, double what the Bogens paid. Still, many remain a bargain by other big-city standards. Plus, the area is easy to navigate on foot, providing an extra perk: “I lost 20 pounds the first year we lived here,” says Deborah.

    What to do

    Museums: The four Carnegie Museums span art, science, natural history, and a collective 1.3 million square feet. The Andy Warhol Museum is a local favorite (the artist grew up here).
    Performance: Renovated concert halls are home to a thriving symphony, ballet, and opera.
    Sports: Thanks to the Steelers, Penguins, and Pirates (who recently made the playoffs for the first time since 1992!), superfans can stay busy all year.
    Outdoors: There are five large city parks, including the 561-acre Frick Park, where you can try lawn bowling or tennis.


    Distributions from most retirement plans, including qualifying 401(k)s and IRAs, are largely exempt. There is an inheritance tax, but there is no estate tax.

    • Income tax: 3.07% flat
    • Sales tax: 7%
    • Median property tax: $2,450
  • Lexington, Ky.

    Retirees looking to mix city activities with country charm will find a lot to love here. Lexington’s historic downtown is packed with galleries, restaurants, and boutiques. But drive just a few minutes and you’re in the rolling hills of Bluegrass Country.

    The city is also home to one of the country’s oldest and most robust lifelong-learning programs, as well as the top-scoring University of Kentucky Albert B. Chandler Hospital, which has received accolades from the American Heart Association and National Cancer Institute.

    Where to live

    Downtown: Over the past decade, a crop of new condos and loft conversions has transformed the center of Lexington. Indeed, developers got a little overzealous during the boom years, says realtor Casey Weesner, so prices stagnated and condos sat empty in the wake of the housing crash.

    The market has picked up in the past year, he says, but there are still some downtown bargains to be had. Expect to see modern two-bedroom condos priced around $200,000.

    What to do

    Sports: Welcome to basketball heaven. The Wildcats, the University of Kentucky’s powerhouse team, play at Rupp Arena, which also hosts shows and big music acts.
    Education: Locals age 65 and older can sit in on university classes, sans tuition, whenever there are open seats. The school’s Osher Lifelong Learning Institute offers classes for the 50-plus set.
    Arts: The campus also boasts the Singletary Center for the Arts. Downtown, the Kentucky Theatre shows independent and classic films.
    Outdoors: Churchill Downs, home of the Kentucky Derby, is 90 minutes away. Bikers can hop on the 12-mile Legacy Trail, which leads to the equine events at Kentucky Horse Park.


    Up to $41,110 per person in retirement income is exempt. Homeowners 65 or older get a property tax break. Some family members are exempt from the inheritance tax.

    • Income tax: Top rate is 6%
    • Sales tax: 6%
    • Median property tax: $1,620
  • St. Petersburg, Fla.

    Can’t imagine retirement without a beach? In St. Pete you can dip your toes in the Gulf of Mexico or Tampa Bay — plus play a round of golf, eat virtually any type of cuisine, and see famous art, all in a single day.

    While St. Petersburg is undoubtedly a retiree hotspot, the city has also drawn more young families in recent years, says local realtor Judy Horvath. The mix helps keep the city vibrant and stocked with boutiques, galleries, and restaurants.

    Where to live

    Downtown: The market for new apartments and condos was flattened by the bust, but developments are now back on track and in many cases selling out quickly. New two-bedrooms downtown start at around $300,000, says St. Petersburg agent Rachel Sartain.
    Surrounding neighborhoods: If that’s too expensive, going five or 10 minutes outside of downtown brings prices down dramatically; condos in many central areas start in the $200,000 range, says Sartain.

    What to do

    Beaches: Two of the nation’s best (according to TripAdvisor readers) are just a 10-mile drive from downtown, including North Beach, located in the 1,140-acre Fort De Soto Park.
    Art: Try the Dalí Museum for works by the Spanish surrealist, or the Museum of Fine Arts for Monet and O’Keeffe
    Tropicana Field is home to the Tampa Bay Rays. There are also plenty of golf courses, including Mangrove Bay, a par-72 championship course. At $25 a round, these municipal greens may be the city’s best bargain.


    Retirement income is not taxed. Permanent residents get a property tax exemption of up to $50,000.

    • Income tax: None
    • Sales tax: 7%
    • Median property tax: $1,080
  • Boise, Idaho

    © imagebroker / Alamy

    Moving to a mountain town means easy access to skiing, hiking, golf, fly-fishing, and more. Unfortunately, it also usually means jaw-dropping home prices, a dinky airport, limited health care, and tourists galore. Not in Boise.

    Yes, locals here can ski at Bogus Basin 16 miles from downtown, stroll or bike 85 miles of trails, and paddle or fish on the Boise River, which runs through town. But they’ll also find low taxes and affordable homes.

    Plus, Boise has become a nucleus of culture and health care. Saint Alphonsus Regional Medical Center is ranked in the top 5% of hospitals nationwide for clinical performance.

    Where to live

    North and East of downtown: Prices in the city center are steep, so buyers should concentrate on the surrounding neighborhoods, says Boise real estate broker Jason G. Smith. “Traffic isn’t an issue,” he says. “So you don’t need to be right downtown to enjoy it.”

    You’ll find two-bedroom condos or small single-family houses priced at about $300,000 in the North End.
    Southeast and Northwest Boise: On a tighter budget? Head to these neighborhoods (located about 10 minutes from the city center) for homes starting around $200,000.

    What to do

    Outdoors: Walk along the Boise River Greenbelt or explore the trails winding out of Hull’s Gulch or Camel’s Back Park. The city has two open-air Saturday markets, which are a great place to find produce and bump into friends.
    Art: The Boise Art Museum has 3,000 permanent works and presents diverse exhibitions ranging from site-specific installations to collections of ancient artifacts.
    Performance: Grab tickets for the opera, philharmonic, or ballet. Boise State’s Morrison Center hosts national tours of Broadway shows, stand-up comedy, and live music, while the Shakespeare Festival fills a 770-seat outdoor amphitheater.

    And there’s more to come: Construction is under way for a new $70 million, 65,000-square-foot cultural center, slated to open in 2015.


    Retirement benefits are taxed, though some types of pensions qualify for a deduction. There is no inheritance or estate tax.

    • Income tax: Highest is 7.4%
    • Sales tax: 6%
    • Median property tax: $1,230
  • Spokane, Wash.

    © Andre Jenny / Alamy

    Unlike gloomy Seattle, Spokane basks in about 260 days of sunshine a year. Want to get out and soak up that vitamin D? The Spokane area has 76 lakes and five ski resorts, plus plenty of golf courses and wineries.

    The city has urban appeal too, with a downtown that’s become a destination for retirees looking to trade high maintenance homes for condos that are walking distance from restaurants, art galleries, and theaters.

    Spokane residents do pay a hefty 8.7% sales tax, but the state has no income tax.

MONEY Kids and Money

How to Tell Your Kid You’re Cutting Him Off Financially

At some point, you need to have "the Talk." Here's what to say.

Nearly half of middle-aged adults gave financial support to a grown child last year, according to the Pew Research Center.

Whether you’re providing room and board, covering insurance costs, or writing regular checks, you may be doing your child — not to mention yourself — a disservice.

“At some point parents have to help their kids spread their wings, even if it means letting them fail,” says Steve Aucamp, a financial adviser in Washington, D.C.

These cues can help you nudge your child off the dole.

The Ground Rules

Lose the guilt. “Wanting your child to be financially independent isn’t a bad thing,” says Susan Ende, co-author of How to Raise Your Adult Children.

Make a plan. Most experts say it’s best to wean your kids rather than cut them off cold turkey. So think through your terms before broaching the topic.

Pick your moment. Try to time the talk with a life event, like graduation or a new job, says family dynamics expert Ruth Nemzoff.

Not possible? Schedule a chat rather than waiting until your kid needs cash.

When You’re Face to Face …

1. Opening gambit: “We’re glad we were able to help you out these past few years, but we think you’re capable of taking more responsibility now.”

Why it works: “You’re framing this as a positive step forward, not a guilt trip,” says Nemzoff, author of Don’t Bite Your Tongue: How to Foster Rewarding Relationships With Your Adult Children.

2. Explain yourself: “You kids have been our priority for years. Now we need to focus on saving for our retirement. And we also want you to become financially independent adults.”

Why it works: Help your kids understand the big picture, and they’ll be more likely to accept the new reality, says Aucamp. So make sure they know why you’re unable to keep supporting them and that your decision is not a punishment.

3. Lay out the terms: “We think it’s time for you to pay your own rent. To help you get set up, we’ll cover the next three months and match what you save up to $1,000.”

Why it works: You’re spelling out exactly what you can offer in the short term and your expectations for the long term. This approach offers support — and incentive — while holding your kid accountable.

If Junior protests that he can’t swing it? Assuming your terms were reasonable, don’t waver.

4. Give the gift of empathy: “We know this won’t be easy. We’re here whenever you need to talk.”

Why it works: “Make it clear that just because you’re cutting off the money doesn’t mean you’re cutting off the relationship,” Nemzoff says. Instead of cash, hand out advice when asked. For example, you can suggest resources to find a roommate to split the rent or go with your child to look at cheaper digs.

5. Underscore the deadline: “We think three months is ample time to set up a cash cushion. So after Nov.1, you’re on your own.”

Why it works: “People rise to the occasion when they have to,” says Ende.

Of course, deadlines — just like plans — are good only if you stick to them. “If your child comes back home and you swoop in with a safety net,” she adds, “you’ll only have to start the process over.”

MONEY makeovers

Widow’s $115,000 Retirement Savings Plan Too Risky

When a loved one is ill, saving for retirement is never top of mind.

That was the case for Lisa Bowman, whose husband suffered a debilitating stroke six years ago and passed away in 2011.

With a steady stream of medical bills not covered by their high-deductible plan, the couple just managed to get by.

Since Bowman was relocated from Watertown, N.Y., to Arkansas for work last year, she has made saving a priority.

In 2012 she contributed $17,000 to her 401(k), socked away $4,000 in a Roth, and put another $11,000 into individual stocks in a taxable account.

She’d like to buy a home and take a vacation, but she worries that would be too profligate.

“I feel panicked,” she says.

Occupation: Retail manager

Goals: Create a retirement savings plan, buy a new home

Total income: $104,000

Total assets: $195,000
Retirement savings: $115,000
Home equity: $36,000
Stocks: $24,000
Cash: $20,000


To reduce her fear, Bowman needs an allocation that won’t cause sudden losses, says Jeremy Kisner of SureVest Capital Management in Phoenix. And she deserves to have a place she can truly call home.


Diversify. The bulk of Bowman’s retirement assets are in growth-oriented stocks that can be volatile.

“If we had another 2008, she’d be down 40%,” says Kisner. He suggests adding more bonds as well as stocks of companies that tend to grow more slowly but are more dependable.

Related: Couple with $455,000 plays it too safe

Since bonds have had a good run, a 15% allocation makes sense for now, says Kisner; she can add more bonds over time.

At Bowman’s current savings rate, she’s on track to retire at 63 — and she can take vacations too.

Stop picking stocks. For her taxable account, Bowman has been picking stocks willy-nilly. “I feel like I’m throwing darts,” she says.

Kisner suggests she invest in a global allocation fund such as BlackRock Global Allocation BLACKROCK GLB ALLC CLASS 'A' MDLOX -0.4243% or First Eagle Global fund FIRST EAGLE FUNDS GLOBAL FD CL C FESGX -0.6267% ; both carry sales loads, but annual fees are low.

“For relatively small amounts of money, a global allocation fund is easier than choosing a bunch of funds based on market trends,” he says.

Buy a house now. Bowman recently listed her New York home but expects it could take a long time to sell it.

She’d planned to save for a 20% down payment on a $150,000 house in Arkansas, though that will take a couple of years or cut into her retirement contributions.

Related: 5 retirement choices: Get ‘em right, live well

Rather than risk interest rates going up, Kisner suggests buying now using a Federal Housing Administration loan, which requires just 3.5% down. At today’s rates, her monthly nut on a 30-year FHA loan — including taxes and mortgage insurance — will be less than her $1,250 rent.

Bowman says she’ll take his advice: “I feel much better about where I am.”

MONEY makeovers

Saving for College and Early Retirement

Scott and Michele Groth want to fully fund state college tuition for their daughters Casey, 17, and Sydney, 12. Photo: Miller Mobley

For Scott and Michele Groth, the dream of early retirement almost seems within reach.

At age 58 both can start collecting pensions worth about half their current pay, plus cost-of-living increases.

Since Scott is a federal employee, they will also get low-cost retirement health care benefits. All that’s on top of the $315,000 they’ve saved in retirement accounts.

But there’s a big hitch: The Groths want to fully fund state college tuition for their daughters Casey, 17, and Sydney, 12.

Though recent promotions and raises have boosted their income by $20,000 over the past two years, they’ve got only $8,000 in college savings, and Sydney will graduate just a year before their hoped-for retirement age.

Related: Couple with $455,000 plays it too safe

The Groths caught a break when Casey, who will start at New Mexico State University next year, became eligible for a state scholarship that covers eight semesters of tuition as long as she maintains a 2.5 GPA. (Son Jacob, 21, is in the Air Force, which will pay for his degree in full.)

They figure modest retirement dreams will take them the rest of the way. “We just want to spend time at home with our future grandkids,” says Michele.

Occupations: Director of logistics at an Air Force base; first-grade teacher

Goals: To retire by 2023 and pay for their kids’ college educations

Total income: $169,000

Total assets: $375,000
Retirement savings: $315,000
Home equity: $30,000
Cash: $22,000
College savings plan: $8,000


The Groths are underestimating how much their children’s higher education will cost, says Lee Munson, a financial planner in Albuquerque.

Even with her scholarship, Casey’s student fees, room and board, and daily living expenses are likely to add up to about $7,500 a year. And the $50 a month the Groths are putting in Sydney’s 529 plan now won’t pay for much school in six years.


Save for college — quick! The Groths will need to tap some of their $22,000 emergency fund immediately for Casey’s living expenses.

Munson recommends they put $450 a month aside to rebuild that account. They should also put $200 more a month in Sydney’s 529.

Go aggressive. Nervous about what’s going on in Washington, Scott moved 70% of the couple’s retirement savings into short-term bonds last year.

That won’t give the couple the growth they need for a retirement of more than 30 years.

Since they have substantial pensions and can absorb periodic losses, Munson recommends an 80%/20% mix of stocks and bonds. They’ll need to sock away an additional $750 a month to hit their goal of retiring in 10 years.

While that will require some belt-tightening for the next few years while Casey is in school, Scott isn’t fazed: “We can definitely put away more,” he says.

Don’t become landlords. The Groths hope to cut Casey’s living costs by buying a house near the campus in Las Cruces that she can share with roommates.

Related: $214,000 real estate bet a big risk for a couple

Don’t do it, says Munson. They’ll be on the hook for long-distance repairs and maintenance, will need expensive liability insurance, and will add to their debt load with retirement just a decade away.

MONEY makeovers

$214,000 Real Estate Bet a Big Risk for Couple

When Thomas and Narichica Handy bought their first home in Hawaii in 2003, they weren’t thinking of becoming landlords.

A year later, duty called. Deployed to Afghanistan, the military couple turned the house into a rental.

It’s a pattern they’ve repeated over the course of several more moves.

Now they hope the income from their four rental properties scattered around the country will allow Thomas to retire from the military before age 50 and pay for college for their kids, Thomas III, 6, and Hannah, 2. (Narichica, who goes by Richie, left the military in 2006 and is now a schoolteacher.)

The Handys believe the housing market is more likely to appreciate over the long term than stocks, and neither gets an employer match.

They stopped contributing to their retirement plans a few years ago and funnel 10% of their income into a savings account, which they use to fund real estate purchases.

Thomas will get a military pension of half his pay, and the couple expect that two of the properties will be paid off before he retires. He’ll also get $30,000 for his kids’ college, thanks to GI Bill benefits.

Related: Couple with $455,000 playing it too safe

For now, though, the homes kick out only a small income when fully rented, and the Arizona house lacked a tenant for four months last year.

Occupations: Army major; teacher

Goals: Retire from the military within 10 years, fund college for two kids

Total income: $147,000

Total assets: $383,700
Retirement savings:$141,000
Home equity: $214,000
Cash: $24,000
529 college savings plans: $4,700



Betting too much on real estate is a risky proposition, says Kathy Stepp, a principal with Stepp & Rothwell in Overland Park, Kans. “One long-term vacancy could torpedo everything,” she notes.



Take a break from real estate. Hold off on buying more homes, says Stepp.

She understands the Handys’ frustration with the stock market but points out that since the couple bought their first house in 2003, the S&P 500 has gained an average of about 7% a year while the housing market declined. “Look at stocks over the long run,” she urges.

Richie sides with Stepp: “More properties would spread us too thin,” she says.

And the real estate fund that accounts for 11% of the couple’s retirement savings needs to go.

Thomas isn’t convinced: “We have a lot in real estate, but this market is low,” he says.

Create a flexible account. Nearly all Thomas and Richie’s wealth is tied up in retirement accounts and houses. “They can’t access their cash if they need it,” says Stepp.

She suggests the Handys save in a taxable account using low-cost, tax-efficient index funds so they won’t be stuck with big capital gains bills but can tap some of the money if they need to (such as for college). Once they’ve built up that account to the level of their real estate equity, they can go back to saving in retirement accounts.

Related: Five top-rated 529 plans

Assuming a 3% annual increase in rents, the fully rented homes should earn about $30,000 a year a decade from now.

That, plus a part-time job and his pension, should allow Thomas to retire from the military early.

Add another stopgap. Their $24,000 emergency fund might not cover unexpected maintenance costs on their homes. A home-equity line of credit can serve as a backup.

Good idea, says Thomas: “We’ll start the paperwork right away.”

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