Ask the Readers: 4 options for the next step

Ken is sending his financial situation into the GRS ether to see what you have to say. Here's a snapshot of his finances:

I thoroughly enjoyed reading your article “What Next” and the “Ask the Readers: What is the Next Step?” because that is my situation. I have been struggling for the past year to figure out where to focus my attention.

  • I am married with no children. My wife and I are 43 and 40 (respectively).
  • We own a home (a duplex, with my mother-in-law in one side and us on the other). We have $188,000 with 25 years on a 30-year mortgage. My current estimate is the house is worth about $205,000.
  • We own a second duplex. This was our first home bought about eight years ago. We tried to rent it out at first, but we had too many renter issues and gave up being landlords (currently have a relative living on one side who pays $300 rent and takes care of the property and utilities). We owe $142,000 on this property, and current market value is around $100,000. (There have been several units similar to ours sold at $95,000 to $100,000 in the past few years, dramatically bringing the market down. We have been making double payments trying to get the principal down to sell it.)
  • We currently have about $50,000 in the bank, which is about six month' worth of expenses.
  • We have three cars (one of which my mother-in-law drives) — all three are paid off.
  • I have a student loan with a balance of $7,000 at a 2.5 percent rate.
  • I max out my 401(k), but my wife's employer does not offer a 401(k) (and we make too much to do tax-free IRA contribution for her or to do a Roth IRA).
  • I have recently converted a term life insurance policy to a universal life policy with a paid-in-advance (PIA) rider (so I am paying $500/month premium) and was looking to do the same with my wife.

I have thought about doing a few things financially, but have been a little stuck with what to do.

  • Pay off student loan. This is an obvious one. We just finished paying off my wife's 2010 car, which had a higher interest rate (so I will likely do this soon)
  • I have also thought about Treasury bond laddering; EE bonds double every 20 years. Since we can't contribute to a 401(k) for my wife, we could buy $15,000 worth of EE bonds each year. In 20 years she will be 63, we could cash in and use $15,000 for living and reinvest the other $15,000, until a time when we will need the whole $30,000 income.
  • Set up a universal life policy with PIA rider for her and over pay the premium (this is from the “bank on yourself” method — but we would target to not touch until retirement, then use the money as tax-free income).
  • Put more money toward the second house to get rid of it sooner.

Ken has four suggested courses of action for his “next step.” Which path do you think he should take, or do you suggest an alternate route?

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TheGreedMachine
TheGreedMachine

Instead of Series EE bonds, you may want to look at some in-state municipal bonds. They would likely have a better yield and be double tax exempt which would allow your money to grow much more quickly.

Alex
Alex

I suggest that whatever you do, do not buy Universal Life Insurance. Cash Value policies do not typically return that much. You are better off investing your money into the stock market.

If it is your concern about your Life and you want it insured, then go with term insurance. Term Life Insurance offers the highest amount of coverage for the cheapest price. It does not offer a cash value, but that is okay because you can handle the money better than the insurance company by investing it or putting money towards the house or loans that you listed.

Tom
Tom

First of all, I would have liked a little analysis/opinion from Ellen. You’re the financial professional writer. Also this lacks a lot of details for strangers like us to make decisions for him. But anyway, on to the writer… You have $8000 a month in expenses! Is that including your 401k/other savings? My thoughts: 1. Goodbye student loan – you should pay that in one fell swoop. If you don’t qualify for the Roth, you may not qualify for the interest deduction here either, and at a relatively low balance and interest rate, it probably doesn’t amount to much anyway.… Read more »

nicoleandmaggie
nicoleandmaggie

Ellen–

Maybe you could hire someone with expertise just to do the Friday questions from readers? (My dream would be for Donna Freedman to come back, given that one of her sticking points was coming up with ideas, but alas, probably a pipe dream.)

Viola
Viola

The segment is called “Ask the Readers,” not “Ask Ellen.”

John
John

Ditch the life insurance – if anything, get a “normal” term policy. Look for a RE management company to manage your rental. Pay the rental down and keep it (if you are making money through the management company) or sell it (if you are just tired of it).

Julie
Julie

GRS isn’t what it used to be guys. Your editorial drift has been obvious since JD left.

The pieces are shorter, fluffier and much less of the in depth, personal, and important topics they used to be. Many of the posts just aren’t compelling.

It’s a shame. You’ve lost this reader. I’ve checked in periodically over the last few months and am not seeing much I’m interested in any more.

Hope you all pull it together.

Mike Holman
Mike Holman

Most sites don’t make much money from their regular readers – it’s usually the search engine traffic visitors that pay the bills.

So the new owners of GRS are probably not too concerned about losing a few regular readers.

Peach
Peach

I actually think it’s a good thing that people who are not content with this blog choose to leave. Hopefully they will find what they’re looking for somewhere else. During the last 3 years or so, even when JD was here, there were all kinds of complaints about what was written, how it was written and what should have never been written, mostly by people who never wrote an article themselves. I’ve never understood why it’s so hard to accept that people grow and things change.

Dan
Dan

Use a back door Roth IRA for your wife, since you seem to be interested in saving for her retirement.

Mom of five
Mom of five

You absolutely can do a Roth IRA – get a conventional (non-deductible) one and convert it. I’m not saying a Roth is better than the EE bonds, I just want you to have complete info before you choose one route over another.

rjack (Mr. Asset Allocation)
rjack (Mr. Asset Allocation)

I know you don’t want to hear this, but I think you should reconsider renting out the property. Have you considered hiring a property manager to deal with all the headaches? Any income from the property is better than no income.

If you don’t want to do that, I would sell the property now even if I had to dig into the emergency fund. I consider the negative cash flow from the property an emergency.

Sheryl
Sheryl

Two things come to mind. First is to do something about that second duplex as it sounds like you are simply throwing money down the drain as at a lost cause. The property management idea suggested above might be the way to go.

The second is get some retirement money in your wife’s name. It sounds like those savings are all very heavily skewed towards you, but she needs security as well.

Mom of five
Mom of five

I think there’s not enough information here to give an opinion. Some questions I have:

– Are you planning on adding children to your family?
-How much is helping out your family optional to you and your wife? Right now you’ve got two relatives on the payroll.
-How much do you already have saved? How much do you project you’ll need in retirement?
-Is there a particular reason you need to spend so much in life insurance?
-Did the $50k in the bank come through savings or some sort of windfall?

Matt Becker
Matt Becker

As other commenters have noted, you can absolutely contribute to a Roth IRA, but it will be more complicated if you have any Traditional IRAs. You can read a little more about it here: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA. It sounds like you’re trying to be proactive about investing for your future, which is a good thing. But I think you need to come up with an overall plan before you commit to bits and pieces like universal life insurance and EE bonds. Start learning about asset allocation and make a plan for yourself, then implement the individual pieces. You can read about asset… Read more »

Mike Holman
Mike Holman

Not sure why you want the universal life. I’m not a fan of combination products ie retirement savings/insurance product because they usually have higher fees.

Stick with term insurance and do the investing in a brokerage account.

My Financial Independence Journey
My Financial Independence Journey

I don’t really like any of your proposed next steps. – You state that $50,000 is equivalent to 6 months of living expenses? That implies that your living expenses are $100K per year? Please tell me there is a typo in there somewhere. If not, this needs to be fixed first. – You have a duplex that is basically a financial hemorrhage. Hire a property manager, throw out your virtually freeloading relative, and get some cash flow. – Are you pulling in any money from the first duplex unit that you rent to your mother in law? – Your student… Read more »

nicoleandmaggie
nicoleandmaggie

Agree with the folks above. It sounds like you’ve been talking with someone whose interest is in ripping you off. 1. 100K/year is a lot of spending– I assume some of that is going towards your properties? 2. You need to unload that rental property long before paying off the student loans. Assuming you’re not willing to foreclose or short-sell, direct extra payments to that so you can unload it. (Or, if the numbers work out, hire a property management company. I suspect they may not work out.) 3. Universal Life coverage is a HUGE rip-off. Convert back to term… Read more »

Janette
Janette

Not enough information. Do you have other retirement savings? You pay two full mortgages at what rate? Does your $50,000 safety net include those? I know of no one who uses whole life as a savings vehicle. If you make enough to not contribute to an Ira – you are making a good amount. That is not surprising for your ages. Where is your money going? Have you done a budget? You are financing about $350,000 in housing? What is that doing for you? Do you feel that your real estate is in an area that will turn around? As… Read more »

broncobilly
broncobilly

Oh Ken where to begin. 1. Get a good term life insurance policy for you and your wife. Once thats complete ditch your whole life policy. 2. Now with that freed up money (~$900 month) open up two traditional IRA’s (one for you, one for your wife) and open two roth IRA’s. Put $900 (split) in the traditional IRA’s each month. In novemember d0 a recharacterization on the traditionals transfering them to the Roth’s (backdoor roth). Invest in good growth stock mutual funds in the roth’s only. 3. Take $7000 and pay off the stinking student loan! 4. Rent that… Read more »

Jo
Jo

$7000 student loan @ 2.5% is about $15 in interest a month. Not a big deal.

I always thought that if you can invest and make more than your current student loan interest, then do that, and pay off more slowly. If you are paying more in interest than you can feasibly make (say 6 or 7%) then pay them off as soon as possible.

Tracy (the other one)
Tracy (the other one)

Holy crap…are you me? We are in almost exactly the same situation, except our we are carrying less debt and are in a stable financial market. But same thing…supporting my mother in a second house, paying all her bills except food/groceries/incidental fun stuff; gave her our paid off car and bought a second car for ourselves; carrying two mortgages, etc. However, we busted our asses paying off a home equity loan and the car loan in 3 years, so now we have no debt except the mortgages. We also have about 6-9 month emergency fund and are maxing a 401k.… Read more »

Ed S
Ed S

I’m with the IRA recharacterization/backdoor Roth folks. It’s a small piece of the pie, but considering how much you are putting into the insurance account just to get at tax free income later, it’s probably worth siphoning money to max out the Roth.

Ray
Ray

Well, I guess this is where my Dave Ramsey knowledge can be put to the test. Right now, I am trying to follow what he suggests for my own finances and it has worked out good so far. I have a long way to go…but after listening to his radio show daily for the past 6 months, I have a feeling this is what he would say if you called him: 1) Immediately pay off the student loan from the emergency fund….there is no need to make payments if you can afford to pay it off. 2) Assuming that is… Read more »

Ely
Ely

I guess this is why I have my doubts about Dave Ramsey… the ONLY step of these I agree with is #4.

Maybe his advice is appropriate for people in an earlier stage of personal finance, but here I don’t think it’s helpful at all. Just my opinion, I guess.

Brad
Brad

Ely,

Regarding #1, why on earth would you keep paying interest on a $7,000 loan when you have $50,000 in the bank? I can’t think of a single good reason to not pay it off today.

Ely
Ely

I wouldn’t say don’t do it, I just don’t think it’s that important. Tiny student loan interest on a tiny loan pales in comparison to the other disasters this couple is facing. That $50k might make a bigger difference somewhere else.

Tracy (the other one)
Tracy (the other one)

My impression of Ramsey is exactly that…great for people who are just starting out (and I think his debt snowball concept works wonderfully for most people). However, I think that people need to be a lot more careful of his advice after the first couple of ‘steps’.

Denise D.
Denise D.

The Universal Life sounds like a bad idea. I prefer term life and have never heard an argument strong enough to persuade me otherwise. I am not a huge fan of Series EE bonds. The rate of return isn’t great. Why not just use a regular brokerage account and invest in mutual funds? That’s probably what I would do. I’m pretty sure you can still use an IRA. I believe someone else posted a link explaining how to do the Roth conversion if you’re over the income limit. Regarding the property, since you appear to be stuck with it, I… Read more »

mike
mike

Just a note on Back Door Roth,

depending on the amount you may have in a traditional IRA already, you can seriously get taxed almost on the full amount of your contribution when you convert. If say you have 95k in reg ira say from a 401k rollover and you have 5k that you did a non-ded ira so you could convert to roth. The taxable portion of the back door is based on all you total iras amount, so you would have to pay taxes on 95% of the back door if I understand the rules correctly.

Mike Holman
Mike Holman

After reading some of the other comments, I think you should make a decision on the extra property.

Either sell it and use your emergency cash to fund the difference or rent it out properly.

Pick one or other and move on.

Retirmentbuff
Retirmentbuff

It sounds like your primary job generates enough income that renting the second duplex is not worth the effort so sell it and pay off the difference. Your family member is covering the cost of interset but overall it continues to be a distraction with no tangible economic benefit. Hire a great real estate agent and work with them to maximize marketability and sell. You’ve essentially already decided to pay the student loan soon. In the scope of your finances both the amount and interest are negligible, but again, your time and focus are assets so eliminate this distraction also.… Read more »

Laura
Laura

If you don’t qualify for a ROTH IRA, why are you not looking at a traditional IRA? Also it wouldn’t hurt to put money into a regular investment account…use low cost mutual funds (Vanguard has some good ones). You are wasting your money on Universal Life Insurance, stick with a level term policy. Seriously. Does the $300/mo you are charging your relative for rent on the other duplex even begin to cover your mortgage payment? What is the going rate on rents in the area? Rent that puppy out for the going rate even if you need to look into… Read more »

PersonalFightnance
PersonalFightnance

1. Sell you 2010 car because it’s going down in value like a rock.
2. Short sell your underwater first home. Don’t fall love with the anchor.
3. Pay off your student loan today.
4. Cancel your whole life insurance policy and go back to term immediatey at any cost.
5. Buy disability insurance.
6. Congratulations on having an emergency fund

Sam
Sam

Your wife can likely do a non-deductible IRA and then convert it to a Roth IRA. I would do that before bonds.

And I don’t understand why you would let a duplex sit around unoccupied but I didn’t read the article as to why you gave up being a landlord. Even if you have to rent it out for undermarket to get good tenants you are way better off than letting it sit idle.

Aaron
Aaron

Sounds like you’re not in a bad place financially which is a blessing. Recommend: 1. Hiring a property management company to find tenants that will pay much more than $300/month, provide a deposit, and ensure you receive your check each month. This is a great option if you are thin on time, and since you seem to be above the Roth IRA limits for ordinary income it is likely you and your wife’s professional duties are demanding. 2. Have your family move out of your rental unit. Doing business with family can end poorly…I have experience in this area with… Read more »

Dennis
Dennis

Great job! Consider evaluating your options based on the return you’ll get on your cash flow. After you pay all your bills, how much cash do you have left? Don’t include the doubling up of payments on the duplex. I call this your positive cash flow. What’s the interest rate that you are paying on each of your mortgages? For you duplex, what’s the market rental rate in your area? You may be too deeply discounting the value of having a family member be your eyes and ears. Have you considered using a property manager? If you did, how did… Read more »

Diane
Diane

Wow, so hard to know where to begin. First, WHY did you “convert” a term life insurance policy? I smell a rat here. Universal Life Insurance earns much higher commissions for the seller, but not necessarily more of anything cost effective for the buyer. Next, renting to a relative for less than market value has negative tax consequences. The IRS will come looking for you on this one. Get a management company and get that sucker rented asap. Paying down the mortgage so you can sell it is unbelievably boneheaded in your circumstances. The market is improving. Save your cash… Read more »

Ely
Ely

Do these negative tax consequences still apply if the family member is performing a service? It seems to me they get cheap rent in return for labor of looking after the property. A lot of people seem to be missing that; this relative isn’t just a freeloader. Necessarily.

Diane
Diane

Dunno, that’s why I gladly pay for the services of an experienced CPA.

Otherwise, a good place to start would be irs.gov.

If the relative is performing “services” such as mowing the lawn or shoveling snow, I doubt that would pass the IRS smell test.

Jake Erickson
Jake Erickson

Here is what I would do if I was in your situation. 1. Pay off student loan ASAP. 2. Cash out your life insurance and buy term for less than $100 a month for both your wife and you. 3. Don’t do the treasury bond idea. Doubling every 20 years averages out to less than 4% a year, which is terrible compared to the stock market. Also, there isn’t a ton of risk in the stock market if you’re in it for 20 years. 4. Put all extra money towards that 2nd house (maybe even use $25k from emergency fund)… Read more »

KSR
KSR

The reality is…if you don’t partake in compounding interest on your own behalf, you end up paying it to others. If you continue to be a debtor, you will never receive any credits. Before you leap, tread. Your 4 options are all wrong (sorry), as others have already pointed out. I wish you the best of luck–it is obvious that your dedication to family is a measuring stick of your human depth and good character. But, it’s time to put yourself first and mend this, for you.

skeptic
skeptic

how can anyone ask for general financial advice but not mention their expenses and income? Location is also helpful. but based on the “too much income for tax-free IRA” comment, it seems like you and your wife make a combined 173,000/year or more? Or maybe I misread that. With an income like that, and low housing expenses, you should be able to put a lot of money toward debt reduction and/or savings each month. If not, cut your expenses! If you aren’t tracking them now, I’d start tracking. Kudos for housing your mother in law. Are you otherwise supporting her?… Read more »

Mom of five
Mom of five

Something that I’d like to point out is that there may not be too much point having more than $2.25 million in tax advantaged retirement as the politicians are now talking about taking it. It’s sounds like you’re high income. I suspect if you continue to max out your own 401k, you will be somewhere between 2 and 3 million on your own. It may well be best to put other retirement savings in non-tax advantaged brokerage accounts.

mike
mike

It could be all up for grabs it doesn’t matter where you put it legally that is, because if the sh$t hits the fan, they’ll take it. Just like in Cyprus.

Howie
Howie

I would suggest in a more Mr Money Mustache vain to do. 1.Hire a property manager and rent out both units of your duplex.(ask family member to vacate or pay market rent) Stop making double payments on the mortgage. Instead bank the extra payment and pay off your student loan debt and just replace those funds. 2.Sell one of your 3 cars and work it out between the three of you on who needs a car for what. If your motherinlaw is retired it should be no problem. If it is her car and she paid for it then you… Read more »

Diane
Diane

Oh Howie,
Did you really just call MMM vain? Say it isn’t so!

Howie
Howie

Diane I hope I didnt offend you. I love reading the hottest blogger on the internet. I meant in his mindset thats all. I think I found about MMM blog from this blog a long time ago. Not 100 % sure though. I will say the quality and versatility of the different bloggers is quite refreshing. I read Your Money or Your Life many many moons ago and that book hit a chord with me. One other point for the family . In terms of life insurance , term insurance for 20 years will give him the best low cost… Read more »

Diane
Diane

Oh Howie, you missed my point completely! You didn’t offend me, you made an error that was actually fairly humorous. You used “vain” for “vein”, thereby inadvertently appearing to accuse MMM of vanity. One of the great thing about MMM is the quality of his writing. Content, grammar and punctuation are all top-notch.

Lucas
Lucas

Sorry to be harsh here, but the main thing you need to do is get your spending in order and fast!!!. If you make enough to not be qualified for a ROTH and yet still have this much debt sitting around you definitly have serious cash flow issues. Forget about the best way to invest and figure out how to live on less. This is the #1 best thing you can do, and everything else will fall into place. And yes – either sell the other duplex or hand it over to a rental manager to at least get something… Read more »

Mark ferguson
Mark ferguson

My first plan of action would be to get a property manager. They will charge you 10% of rents collected. You will see an immediate gain and won’t have to worry about the property. I make over 24% cash on cash return on my rental properties. My plan Of action is getting as much cheap set as possible to buy as much high returning assets as I can(rental properties). I would not pay down student loans because your interest is so low. Unless there is no other option to make more than 2.5%. I have a ton more info on… Read more »

kEN
kEN

I have not read views from others, so this is just my own 2 cents for you. 1. Pay off loans first (period). 2. Put more money into the home (first or second). This is a critical second step. 3. ULIP (Univ Life Insur Policies) are big investment+insurance gimmicks that do NOT make sense, sine the costs are high, cannot withdraw for a while, and you can replicate the same with Buying Term and Investing the Difference. It is for people who cannot save money, and not for good savers like you. In my opinion, Annuity fits in the same… Read more »

David
David

Seemingly reasonable goals 1. One House with a minimal term mortgage 2. No other outstanding debt 3. Appropriate life insurance 4. Appropriate Retirement savings To address, categorize the key issues – 1. Two Homes is untenable You are underwater on the second duplex and getting essentially nothing for rent. A property manager is one reasonable option, but I would consider selling the house you are in since it wouldn’t leave you further in debt and move back into the old one. At even close to what your are probably paying on both properties, you could probably have it paid off… Read more »

Jon
Jon

I personally would try to pay off that second duplex to get rid of it. That seems like it would free up major cashflow, since you aren’t able to effectively rent it out. Perhaps by the time you have it paid off to the point to try and sell it, it will be worth a bit more too.

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