Single dad is struggling

Air Force vet has son, 10, at home, plus he's helping grown daughter

Your Money

October 08, 2006|By Janet Kidd Stewart | Janet Kidd Stewart,Your Money Columnist

Like many single parents, Ashby Alexander struggles to balance the financial priorities in his life.

He has helped a daughter, Brooke, 25, through college and part of graduate school and wants to do the same for his 10-year-old son, Jordan.

"I'm a proud father, and their schooling is paramount to me," the 45-year-old Hampton, Va., resident wrote in a letter requesting a Money Makeover.

But there are other priorities: Alexander needs to pick up the pace on his retirement savings, pay off a second mortgage and cut down on overspending. But he has time to make some adjustments that could help him get back on track.

College and other expenses have wreaked havoc with Alexander's dream of retiring at 62, and he's going to have to drastically alter his spending just to be able to hang it up at 67, concluded Christopher Portner, a certified financial planner with PSA Financial Advisors Inc. in Lutherville.

By then, he'll need to save an additional $260,000 over his current savings rate to be able to spend as much in retirement as he does now, Portner said.

"He's in a position where the resources aren't enough for all the goals," Portner said after conducting a review of Alexander's financial picture. "I had to keep pushing him on what's most important, and that focused him a bit."

After 22 years with the Air Force, Alexander retired in 2003 with an annual income of roughly $65,000, including his pension and about $46,000 a year from his job as a hazardous-materials-site manager for a private Air Force contractor.

$29,182 loan

But Alexander continues to help Brooke with living and graduate school expenses, and his credit card bills for everyday expenses were piling up. Two months ago, he took out a $29,182 second mortgage to pay off a car loan and some tuition for Brooke and his own credit card bills.

Now he owes $194,492 on his home, valued at $290,000, but he has no other debt. He has $16,901 in his 401(k), $5,766 in an IRA, and $10,206 in his non-retirement accounts.

It's crucial that he take on no more debt, said Portner, who urged Alexander to start tracking his expenses and set a strict monthly budget to ensure that he doesn't run into another negative cash-flow situation.

How much is reasonable to save? Because a big portion of Alexander's government pension is tax-free, and because his original mortgage, at $1,238 a month, is below 25 percent of total gross income, Portner thinks Alexander could be saving up to 20 percent of his annual income.

That amount, roughly $13,000, is substantially more than he's socking away now.

For now, Portner suggests starting with smaller goals.

First, Alexander should focus on cutting debt and boosting his savings account. By overpaying his $337-a-month second-mortgage payment, to $560, he will eliminate that debt in slightly more than five years.

Adding $54 per biweekly pay period to his 401(k) plan at his civilian job will bring his contributions to 15 percent of pay from 12 percent.

$15,000 reserve

As he cuts spending, additional money should go toward building an emergency-cash-reserve savings account of roughly $15,000, Portner said. Alexander is currently overpaying taxes, so his refund each year should go straight into this reserve account, the planner said.

Once the second mortgage is paid off, those payments can be redirected to an individual retirement account and college savings for Jordan.

Portner also suggested Alexander pay for additional disability insurance at work and consider adding about $200,000 in 15-year term life insurance to his existing coverage of $100,000.

He also should transfer the title to his daughter's car to her name alone to avoid potential liability problems, he said.

For his part, Alexander said he's ready for some drastic spending cuts to get Portner's game plan working.

"I've cut up all the credit cards - they're done," he said.

Monthly expenses also are helped by Alexander's former wife, who pays for Jordan's after-school day care during the school year.

He's also talked with his daughter, who is studying to be a psychologist, about getting some help with Jordan's college education should Alexander become unable to handle the bills when it comes time. Still, Brooke will have some student loans to pay back.

The conversation with Brooke was a difficult one for Alexander, he said, because he always has strived to be the one the family leans on. Growing up with a single mother, he said he feels extra pressure to be the breadwinner for his own children.

"I know I have some work to do to get there, but I know I can do this and I like what I see" in the financial savings plan Portner laid out, Alexander said.

Already, Alexander said he has increased his home-equity-loan payment to $560, and plans to boost his 401(k) contribution to 15 percent of his income, beginning in the next open-enrollment period. He has removed his name from his daughter's car title and is planning to add to his life insurance beginning in January.

Pension may rise

He also recently learned his Air Force pension income could rise by $300 or more per month next year under some Department of Veterans Affairs offsets. If that happens, Alexander promised that money would be heading straight for retirement and future savings.

Tightening the household belt won't affect what father and son love to do together, which is hang out in the backyard playing basketball and baseball, he said.

But it will mean fewer dinners out and forgoing a lot of other day-to-day luxuries.

"I'm ready," Alexander said. "I know I can do this."

Janet Kidd Stewart is a Your Money columnist.

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