Helping a Couple Escape Their Financial Trap
The couple had made every mistake you could: retired too early, spent too much, took on too much house and too much debt. “This is killing me,” Sarah told the adviser, as she burst into tears.
Doug and Sarah had left their well-paying jobs in their late 50s, with little idea how they would pay for a long retirement. With anguished faces, they came to Eve Kaplan, an advisor in Berkeley Heights, N.J., for a solution. As a financial adviser, her solution was tough love, and since they were at their wit’s end, they were open to hearing it.
Kaplan and the couple created a plan to save them from personal bankruptcy: sell their home, pay down credit card debt, cut up all cards and only use cash and create more realistic financial goals. “This couple is still working on their recovery plan, yet things are looking brighter,” the adviser said.
When they came to her office, they were laden with paperwork showing their financial distress. The card statements alone were hair-raising. Kaplan said, “They needed an objective person to tell them: Sell the house, tear up the cards and don’t use them again.”
To these well-educated professionals, everything once seemed affordable. He was an executive at a manufacturing company, and she was a community college teacher. Then he got laid off, and they both figured they could afford to kick back.
But they had no idea what their situation truly was. They had paid to put their four children through some of the best — and most expensive — colleges. They lived in a high-toned New Jersey town outside New York City: It had excellent schools. Trouble was, that meant high property taxes.
Although they lived in an elegant home, their net worth was minuscule due to a $200,000-plus credit card debt, a large mortgage and virtually no savings, apart from Sarah’s 401(k). Doug’s 401(k) was gone already. To meet expenses, they had drained his account, which of course incurred taxes and penalties.
“With the kids gone, what they should have done was downsize their lives and Doug should have gotten another high-paying job,” Kaplan said. But they coasted along for a few years. Prolonged unemployment does not look good on a resume.
Their house was beautiful, full of antiques, but debt-laden. The place was worth $1.5 million, but it carried $1 million in debt, from both the mortgage and a home equity loan.
So they sold the house and the antiques, and channeled a big chunk of the proceeds to getting rid of the card balance.
Doug and Sarah originally are from Iowa; they have an adult son living there, so the couple moved there to join him. After they retired, their cost of living has declined significantly and they slowly are building up their net worth. Doug found a part-time teaching position and Sarah located an office job.
They don’t have a bright future yet, although they are working on it.
Larry Light writes for AdviceIQ, which delivers personal finance articles by both financial advisers and AdviceIQ editors.