MONEY retirement planning

Money Makeover: Married 20-Somethings With $135,000 in Debt—And Roommates

The Liebhards
Julian Dufort

A young couple gets some advice on how to save for the future even while saddled with loads of student debt.

Samantha and Travis Liebhard, both 24, met as college freshmen, married right after graduating in 2012, and quickly moved to Minneapolis so that Travis could start his graduate pharmacy program at the University of Minnesota—Twin Cities.

They face intimidating debts: Travis has racked up $135,000 in student loans and expects to incur another $60,000 before graduation. Barely making ends meet this year, the couple came up with an idea: Why not cut their $1,500 monthly rent in half by giving up their big two-bedroom apartment and finding room­mates to share a similarly priced four-bedroom unit?

So in September, two of Travis’s classmates moved in with the Liebhards. Now Samantha’s $40,000 salary in her public relations job and Travis’s $8,000 pay from a part-time hospital job seem like enough to get by on. Samantha complains about dishes in the sink and clothes left on the floor, but the four roommates get along well. “It’s helping me prepare to have children one day,” she jokes.

Retirement seems far away, given the Liebhards’ more urgent financial concerns, starting with the student debt. The couple also want to have kids and buy a house, but Travis won’t be making a full pharmacist’s salary of about $120,000 for another four years; after his expected graduation in 2016 comes a two-year residency, paying about $40,000 annually.

The Liebhards don’t know whether to save for re­tirement now or just focus on their debt. So far the couple have only $2,000 in the bank and $3,200 in retirement accounts. Samantha wants to get serious about saving for retirement, but Travis isn’t sure: “It’s hard for me to even think about retirement until we can real­ly do something about it.”

Helping the Liebhards navigate their options is Sophia Bera of Gen Y Planning in Minneapolis. The key to success, she says, is to have a reasonable spending plan and take incremental steps.

The Advice

Save in moderation: Given how much Travis owes, plus the 6.8% interest rate on most of his loans, repaying debt should indeed be the couple’s top priority, says Bera. So for now Samantha should only bump up her 4% 401(k) contribution to 6%—enough to get her full match. Her 401(k) portfolio—half in a 2020 target-date fund and half in a large-cap U.S. stock fund—is too conservative for her age and not properly diversified, says Bera. Her plan’s 2050 target-date fund, which is 80% in stocks, would be a better choice.

Bank some cash: Because the Liebhards have little saved for emergencies, Bera says they should put Travis’s $800 monthly pay­check­—the amount they are saving in rent—into a savings account; the goal is for that to reach $10,000, or three months of their net pay. Next, they need to budget Samantha’s $2,600 monthly take-home pay. Bera suggests $800 for the fixed costs of rent and phones, and $1,500 to be divided between discretionary spending and monthly essentials such as groceries.

Attack the debt: The $300 left over in Bera’s proposed budget should go toward paying down interest on Travis’s debt, even though he can defer repayment until after his residency; his current loans are accruing interest amounting to about $7,000 annually. Their payments will likely qualify the couple for an annual $2,500 student loan interest tax deduction over the next few years. Once Travis finishes his residency, Bera says, he should be able to pay off his loans in 10 years at the rate of $2,300 a month, while maxing out his 401(k) contributions ($17,500 is the current annual limit).

Though the Liebhards needn’t have roommates for­ever, says Bera, they should hold off on buying a home. “If you have student loans the size of a mortgage, you should avoid taking out a mortgage,” she says. Samantha is not so sure. “We can wait a few years after Travis graduates,” she says, “but once we have a child who’s able to walk, we’d like to have a place bigger than an apartment.”

More Retirement Money Makeovers:
4 Kids, 2 Jobs, No Time to Plan
30 Years Old and Already Falling Behind

MONEY retirement planning

Retirement Makeover: 30 Years Old, and Already Falling Behind

When she turned 30, Chianti Lomax had an epiphany: Her salary and savings weren't enough to buy a home or start a family. MONEY paired her with a financial expert for help with a plan.

Chianti Lomax grew up poor in Greenville, S.C., raised by a single mother who supported her four children by holding several jobs at once. Inspired by her mom, Lomax worked her way through high school and college; today, the Alexandria, Va., resident makes $83,000 plus bonuses as a management consultant.

But turning 30 last December, Lomax had an epi­phany: Her career and her 401(k)—now worth $35,000 —weren’t enough to achieve her long-term goals: raising a family and buying a house in the rural South.

Her biggest problem, she realized, was her spending. So she downsized from the $1,200-a-month one-bedroom apartment she rented to a $950 studio, canceled her cable, got a free gym membership by teaching a Zumba class, and gave up the 2010 Honda she leased in favor of a 2004 Acura she paid for in cash. With those savings, she doubled her 401(k) contribution to 6% to get her full employer match.

And yet, nearly a year later, Lomax has only $400 in the bank, along with $12,000 in student loans. Having gone as far as she can by herself, Lomax wants advice. As she puts it, “How can I find more ways to save and make my money grow?”

Marcio Silveira of Pavlov Financial Planning in Arlington, Va., says Lomax is doing many things right, including avoiding credit card debt. Spending, however, remains her weakness. Lomax estimates that she spends $500 a month on extras like weekend meals with friends and $5 nonfat caramel macchiatos, but Silveira, studying her cash flow, says it’s probably more like $700. “That money could be put to far better use,” he says.

The Advice

Track the cash: Silveira says Lomax should log her spending with a free online service like Mint (also available as a smartphone app). That will make her more careful about flashing her debit card, he says, and give her the hard data she needs to create a budget. Lomax should cut her discretionary spending, he thinks, by $500 a month. Can a young, single person really socialize on $50 a week? Silveira says yes, given that Lomax cooks for herself most evenings and is busy with volunteer work. Lomax thinks $75 is more doable. “But I’d like to shoot for $50,” she says. “I like challenging myself.”

Setting More Aside infographic
MONEY

Automate savings: Saving money is easier when it’s not in front of you, says Silveira. He advises Lomax to open a Roth IRA and set up an automatic transfer of $200 a month from her checking account, adding in any year-end bonus to reach the current annual Roth contribution limit of $5,500, and putting all the cash into a low-risk short-term Treasury bond fund.

Initially, says Silveira, the Roth will be an emergency fund. Lomax can withdraw contributions tax-free, but will be less tempted to pull money out for everyday expenses than if the money were in a bank account. Once Lomax has $12,000 in the Roth, she should continue saving in a bank account and gradually reallocate the Roth to a stock- heavy retirement mix. Starting the emergency fund in a Roth, says Silveira, has the bonus of getting Lomax in the habit of saving for retirement outside of her 401(k).

Ramp it up: Lomax should increase her 401(k) contribution to 8% immediately and then again to 10% in January—a $140-a-month increase each time. Doing this in two steps, says Silveira, will make the transition easier. Under Silveira’s plan, Lomax will be setting aside 23% of her salary. She won’t be able to save that much upon starting a family or buying a house, he says, but setting aside so much right now will give her retirement savings many years to compound.

Read next:
12 Ways to Stop Wasting Money and Take Control of Your Stuff
Retirement Makeover: 4 Kids, 2 Jobs, No Time to Plan

MONEY

The Secret Weapon To Early Retirement: Your Home

2013 Getty Images

The housing market’s recent recovery may be one of the things that’s giving you the confidence — and the wherewithal — to retire ahead of schedule. Home prices in 20 major metro areas are up 12% over the past year, the biggest gain since 2006, according to the widely followed S&P/Case-Shiller home price index.

In seven of those markets, values are higher than or nearing their pre-crash peak, says David Blitzer, managing director at S&P Dow Jones Indices. American homeowners have seen their equity rise more than $2 trillion in just the past year, according to the Federal Reserve.

Alas, you can’t count on a housing boom to keep padding your net worth. With rising mortgage rates and tepid economic growth, the pace of price gains is expected to slow. “A year from now home prices will be higher, but half the double-digit gains we’ve seen,” says Blitzer.

You need to set realistic expectations for what your home can do for you, and plan prudently with what you have. That might mean leaving your old digs behind.

What to do

Lose two bedrooms. Moving out of your home of decades can pay off in two ways. By selling into a strong market now and buying a smaller house, you can lock in your good fortune, letting you add to your savings or wipe out any lingering debts.

Related: How much house can you afford?

Plus, if retiring early means learning to live on less, there’s no better way to do that than to cut your housing costs, which typically eat up 40% of retirees’ budgets, according to the Consumer Expenditure Survey.

Get out of town. Only 10% of retirees pick up stakes, though boomers look to be a bit more likely to relocate than previous generations were. In a 2012 AARP survey, two in 10 boomers said they planned to move in retirement.

“Boomers are different,” says Fred Brock, author of Retire on Less Than You Think. “They are willing to move to cheaper parts of the country.” With families more mobile, he adds, you don’t need to be tied to one place to stay near your kids.

Join this minority and move to a town with lower property taxes and lower living costs, as well as cheaper homes, and you can leverage your profits even more. That’s what Sheri and Bill Pyle did when they sold their three-bedroom Cape Cod outside Chicago for $185,000, paid cash for a $128,000 four-bedroom ranch in Tennessee, retired a home equity line and car loan, and added $30,000 to their savings.

And though their income is less than 40% of the $126,000 they used to earn, their cost of living is so low that they are able to get by on their combined Social Security, leaving their $400,000 in retirement savings to grow for now.

Their property taxes plummeted from $7,000 to $500 a year. Milder winters mean their heating bills are a third of what they used to pay. “We could never have done it if we stayed in Chicago,” says Sheri.

Beware the trap of leisure fees. Whether you downsize locally or across the country, it’s crucial that you don’t simply trade maintenance costs for steep association fees.

“I see a lot of people who move into a new home for retirement, and their cost of living goes up, not down,” says Colorado Springs financial planner Linda Leitz, national chair of the National Association of Personal Financial Advisors.

When Gundy and Karen Gunderson retired in 2007, the Seattle couple bought a home in a gated country-club community in Las Vegas. But they were surprised at how quickly the costs added up. Gundy, 66, a former commercial airline pilot, and Karen, 67, a homemaker, estimate they were spending $1,000 a month on dues for the private golf course, tennis and fitness classes, the club’s restaurant minimum, and maintenance on their pool and lawn.

“We ran the numbers and knew we had to make an adjustment if we wanted our money to last,” says Gundy. So this year they downsized a second time, to a Henderson, Nev., retirement community overlooking two public golf courses. Now all they pay is a $93 monthly association fee.

Invest in staying put. All this said, what if you really don’t want to leave your home? At a minimum, early retirees told us they avoided carrying a mortgage into retirement, as 30% of retirees do.

While you’re still working, invest in improvements that will cut costs later, like replacing old appliances and drafty windows and upgrading your heat and electrical systems. “If you’ve been in your home a long time, there’s a lot you can do to make it less costly,” says Stillwater, Okla., financial planner Louise Schroeder.

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