By Beth H. Watson, CFP®
Angela, 51, is a divorced professional with primary custody of a high school senior and a high school sophomore. Fortunately, she has a cordial relationship with her ex-husband, who pays child support and fully participates with her in saving for the kids’ college and the cost of “extras.”
Angela has a lot of responsibilities and things to keep track of, leaving her little free time. As an engineering manager, her typical workday is long because her team solves problems for clients on the West Coast.
Our hypothetical primary parent covers her family’s expenses without a problem, but is well aware that she isn’t getting any younger. She’s always had a vague plan to get ready for her next life stage after her kids are out of the house. She now realizes that may not be the best idea.
Angela will be 57 when her youngest child finishes 4 years of college—that’s just 8 years before she turns 65.
During the divorce six years ago, Angela and her husband split their retirement savings of $200,000. Through modest market growth and contributions of 5% with a 2% company match, her retirement stash is now $190,000. She keeps $20,000 in a savings account penciled in for car replacement and home repairs.
One night around 10 p.m., Angela does an internet search for “financial planner near me” and visits the websites of a few. She books a consultation with us here at Corner Post Financial Planning.
Once we enter into an agreement with Angela, we work with her to establish what she spends each month. This is the first homework assignment.
Some clients have a good budget and data, but most do not. While she lives beneath her means, Angela has never thought too much about her expenses.
Because Angela is comfortable with spreadsheets, we ask her to export her banking and credit card data for the last three months and categorize each expense.
This project allows Angela to see that she spends a LOT of money on her children (as does her ex-husband). Like $1,500 a month, not including college savings. This is what people must be talking about when they say children are expensive to raise, she thinks!
Debt has never made much sense to her. The mortgage on her 3 bedroom home is modest and her small SUV is paid for.
Angela earns $7,100 a month after taxes, 401k, and other paycheck deductions. She gets $1,500 in child support monthly.
Here’s a look at her breakdown:
Monthly income ($8,600):
Net Salary: $7,100
Child support: $1,500
Monthly expenses ($7,800):
Mortgage: $1,700
Children (extracurriculars, activities, allowance): $1,500
Utilities: $850
Groceries: $750
Eating out: $650
Cleaning service: $250
Home maintenance: $400
Charity: $200
Vacation: $400
College Savings: $500
Personal: $250
Entertainment: $300
Professional services: $50
We are glad to see that Angela has an $800 monthly buffer, on average. Just doing this exercise has helped soften her fear that she is overly dependent on the child support payments.
Her ample salary and lack of debt payments allow her the freedom to set aside money for vacations, give to charity, have her home cleaned, and enjoy meals out with family and friends.
Now that we’ve established Angela’s spending baseline, our next step is to do her retirement projection.
Beth H. Watson is CERTIFIED FINANCIAL PLANNERTM at Corner Post Financial Planning.