Financial Literacy - Families and Finance
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Did retired teacher save enough?

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Maria, 68, is a retired schoolteacher who lives in California's Napa Valley. A single mom, she would like to one day leave her three grown children an inheritance.

Maria is in a good position to do that. During her working years, she saved a portion of her earnings in a 403(b) plan, the retirement vehicle commonly used by schools and nonprofits. She receives a nice pension benefit from her tenure as a teacher. She lives in a 7-year-old home and drives a 4-year-old car, both of which she owns free and clear. And she has no consumer debt.

Maria also owns a rental property in Silicon Valley, on which she holds a mortgage. She asked Bankrate for a Money Makeover because she wants to see if she has enough money to last through her retirement and where improvements can be made in her personal finances.

Maria
Maria

Profile: Retired schoolteacher wonders if her money will last through retirement.

The challenge: Maria must decide where to live, and her finances need professional scrutiny.

The plan: Certified Financial Planner Tim Maurer gives Maria high marks for excellent stewardship of her finances.

The challenge

Maria has lived a frugal lifestyle, which has worked to her benefit. She continues to live below her means, even saving a good portion of her pension check. While this has given her peace of mind, it comes at a price: "I realize that the cost of such luxury (peace of mind) means having to pay more taxes for not having significant tax deductions to offset income," she says.

Right now she is undecided about where she would like to live. In 2002, she bought her primary residence in Napa Valley for $365,000, which recently appraised for $320,000 due to the housing downturn. She is considering selling it and using the proceeds to pay off the mortgage on her investment property. That small, 1,025-square-foot home in Silicon Valley is worth more than $1 million, primarily because of the land value. She holds a mortgage of $300,000 on the investment property at a fixed rate of 5.5 percent. Her monthly payment of $2,000 is quite manageable, as she currently collects rental income of $2,450 a month.

Maria also wonders if she should use her retirement accounts to pay off the mortgage on the rental property. Even though she'd lose tax benefits, she'd gain more peace of mind.

She's also considering a cash-out refinancing of her primary residence and using the proceeds to improve her rental home, after which she would move into it. Another idea is to purchase a different property altogether in another California town.

Maria has lots of options, thanks in large part to the careful way she has managed her finances. But she also has several personal finance concerns.

Key issues:
  • Should mortgage be paid off or not?
  • Consolidate bank and retirement accounts.
  • Reconfigure investment portfolio.
  • Re-evaluate insurance needs.
  • Update estate planning documents.

This Money Makeover was prepared by Certified Financial Planner Timothy Maurer, director of financial planning at The Financial Consulate, an independent fee-only financial management firm in Hunt Valley, Md.

Next: The plan.

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