This is a tough post. The couple I'm writing about is just like me & spouse-- shared colleges & backgrounds, graduate degrees, very similar careers, a bit higher on the pay scale.
They're military retirees, they seem to be good people, and they're struggling with their finances. They know they could do better but at the same time they're willfully paying a huge price to be blissfully financially ignorant. I'm actually hoping that they'll read this thread and decide that they need to educate themselves (if it isn't already too late). They're highly unlikely to ever find this board, let alone browse it. But maybe this example can educate someone else-- before it's too late for them too.
I'll try to leave out the irrelevant (and identifying) details. They're both a couple years older than us, raising two teens in a flamboyantly extravagant (yet apparently kid-safe) section of a good town with a high military concentration of active-duty, Reserves, & retirees. Extremely prestigious address, good schools. They moved there on orders and decided to rent amid the horrendous expense. After their third consecutive tour there and contemplating retiring in the area, they decided to buy.
They bought a crappy 1930s two-bedroom bungalow on a 3500 sq ft lot overlooking [-]an alley[/-] a quaint lane. Zillow.com's old data claims that it was worth nearly $1M. Other homes on the block currently range from $1M-$2.5M. However they found the home to be essentially unlivable (and too small for two kids) so they decided to renovate.
You home-improvement experts are already groaning at what came next. (Remember the HGTV show "Before & After"?) They squeezed into a 2BR apartment for almost a year while the house was torn apart. I think they were able to save the foundation and the exterior frame. A second story, new plumbing, new electrical, all new layout-- amid an extremely stringent historical-conservation town association's draconian rules on design & size. The result is a very nice, modern, 4BR 2BA home that fills the lot but has all the family comforts & conveniences. They're within a mile of the beach and the kids have plenty of nearby parks, so although it's a crowded suburban neighborhood (and everyone can see into their neighbor's windows) it's still considered a nice place.
It better be nice, because it could bankrupt them. The problem is that in the process of buying the home and renovating it, they picked up a $1M mortgage. Seven figures!! The house is arguably worth $1.5-$2M, even amid the current meltdown, but almost all of their net worth is locked up in home equity and almost all of their cashflow goes to the mortgage payment. I don't know the precise terms but they started with an ARM and then paid an additional fee to lock the interest rate for five years. Presumably there's some pressure to reduce the balance before the rate unlocks in another 2-3 years.
But wait, [-]there's more[/-] it gets worse.
Early in their relationship it became apparent that he paid the bills only when he needed to clear some counter space. He felt that he was making more money than he could possibly spend so he [-]was saving nothing[/-] didn't mind paying late fees to avoid the inconvenience of doing the bills every month. She took over the bills two decades ago but she hasn't updated the system since-- from her description you get the impression that she's still sitting at the kitchen table with a pile of paper, a calculator, a checkbook, and a roll of stamps. Neither one of them seems to have attempted to educate themselves about their finances. Other than balancing a checkbook, we can't tell that they even attempt to track their expenses.
They are so financially ignorant that for the last two-plus decades they've invested all their after-tax retirement money with First Command. They knew that they were paying more money for less performance than their shipmates, but they didn't really care because they were saving for retirement and First Command kept them from having to deal with all those yucky financial-management issues.
As First Command hit the skids, they eventually realized that they would have to "do something" and they decided to find a new financial advisor. As they started the asset-transfer process, they met with FC's top sales guy. He helped with the transfer but he let them know that he was also leaving FC to start up his own firm. Without actually violating his non-compete agreement, he managed to leave enough locating data for them to track down his new business and sign up.
They're pulling down over $140K/year in COLA'd pensions with cheap healthcare and living a fairly low-key lifestyle amid some of the world's priciest real estate, but they're unhappy and even a bit desperate. They're both working full-time because they're in their 50s with a 30-year mortgage and barely positive cash flow. The husband, in particular, despises his defense-contractor job-- and she would probably be happy to stop working too. I don't know the numbers but from their experience I suspect they're grossing at least another $120K/year. Yet between work & family they're totally exhausted and overwhelmed.
So in the last few months they've relocated their assets to a new brokerage. The new advisor has given them some good advice-- they've filled out an exhaustive balance sheet and personal cash-flow statement. They've completed (and discussed) an extensive risk-tolerance questionnaire. He's walked them through the paperwork to begin maxing their employer's 401(k)s. They're starting 529s for their kids. Of course there are a million websites & library books that will do all of this for free, but he's an experienced and reassuring tour guide. For a fee.
But when they expressed their mortgage fears to him, he put them into a "mortgage accelerator". The first thing is that DFAS screwed up the transfer of her pension check-- it used to be direct-deposited with a credit union but maybe by next month it'll be direct-deposited into the mortgage accelerator's account. So already they're scrambling to make the minimum payment on a mortgage accelerator. The second thing is that they know they're paying fees but they don't really know how much-- they're just following "their" advisor's directions. The third thing is that they are aware they could hypothetically run their own free version of a mortgage accelerator, but they admit that they lack the confidence to set up a plan and execute it. The worst thing is that they don't really know what happens if they decide to refinance the mortgage or even sell the house. Of course they claim they're never moving.
In August they're meeting with the advisor for the next step of their financial makeover. He wants them to roll over all their money from their TSP accounts into his "professionally managed" IRAs. I can't wait to hear the financial [-]logic[/-] rationalization behind this move. Those who aren't familiar with the TSP may enjoy the July 2008 newsletter, which this woman has promised to read: http://www.tsp.gov/forms/highlights/high08c.pdf
The kids, living among friends & peers whose parents are flat-out stinkin' rich, are also blissfully ignorant. The housecleaner was let go for the home renovation, but now they're agitating for a replacement. Their parents are actually considering this, but they're imposing the "harsh condition" that the kids have to pick up everything off their bedroom floors before the housecleaner's visits. One kid's activity (a school golf team) costs $900-- and whatever it's for, I sure hope it covers the entire season. Neither kid does their own laundry, has an allowance, or runs a checking account-- let alone a credit card.
We've known this woman for a few months and my spouse learned the above while sharing a couple days of meetings, seminars, & meals. I'm glad they're not lifetime friends, but it hurts to see how much Stupid Tax they've paid. I've probably loaned out a couple dozen copies of Bob Clyatt's books, but never to people in this kind of financial quicksand. I don't think they'd even recognize how his advice would possibly apply to them, let alone lead them out of debt into ER. Heck, to them the "Finances for Dummies" books or the Boglehead's Guide would seem like a doctoral thesis.
Spouse and I are going to continue our low-key attempts to boost their literacy. But geez... at this stage of their lives, it's hard to argue with the price they're paying. Right now they're just too dangerous to try it on their own-- and although they're anxious about their mortgage, they have absolutely no interest in learning how to handle their finances.
If you recognize yourself in this post or if you have a seven-figure mortgage and a mortgage accelerator-- tell us what you're doing about it!
They're military retirees, they seem to be good people, and they're struggling with their finances. They know they could do better but at the same time they're willfully paying a huge price to be blissfully financially ignorant. I'm actually hoping that they'll read this thread and decide that they need to educate themselves (if it isn't already too late). They're highly unlikely to ever find this board, let alone browse it. But maybe this example can educate someone else-- before it's too late for them too.
I'll try to leave out the irrelevant (and identifying) details. They're both a couple years older than us, raising two teens in a flamboyantly extravagant (yet apparently kid-safe) section of a good town with a high military concentration of active-duty, Reserves, & retirees. Extremely prestigious address, good schools. They moved there on orders and decided to rent amid the horrendous expense. After their third consecutive tour there and contemplating retiring in the area, they decided to buy.
They bought a crappy 1930s two-bedroom bungalow on a 3500 sq ft lot overlooking [-]an alley[/-] a quaint lane. Zillow.com's old data claims that it was worth nearly $1M. Other homes on the block currently range from $1M-$2.5M. However they found the home to be essentially unlivable (and too small for two kids) so they decided to renovate.
You home-improvement experts are already groaning at what came next. (Remember the HGTV show "Before & After"?) They squeezed into a 2BR apartment for almost a year while the house was torn apart. I think they were able to save the foundation and the exterior frame. A second story, new plumbing, new electrical, all new layout-- amid an extremely stringent historical-conservation town association's draconian rules on design & size. The result is a very nice, modern, 4BR 2BA home that fills the lot but has all the family comforts & conveniences. They're within a mile of the beach and the kids have plenty of nearby parks, so although it's a crowded suburban neighborhood (and everyone can see into their neighbor's windows) it's still considered a nice place.
It better be nice, because it could bankrupt them. The problem is that in the process of buying the home and renovating it, they picked up a $1M mortgage. Seven figures!! The house is arguably worth $1.5-$2M, even amid the current meltdown, but almost all of their net worth is locked up in home equity and almost all of their cashflow goes to the mortgage payment. I don't know the precise terms but they started with an ARM and then paid an additional fee to lock the interest rate for five years. Presumably there's some pressure to reduce the balance before the rate unlocks in another 2-3 years.
But wait, [-]there's more[/-] it gets worse.
Early in their relationship it became apparent that he paid the bills only when he needed to clear some counter space. He felt that he was making more money than he could possibly spend so he [-]was saving nothing[/-] didn't mind paying late fees to avoid the inconvenience of doing the bills every month. She took over the bills two decades ago but she hasn't updated the system since-- from her description you get the impression that she's still sitting at the kitchen table with a pile of paper, a calculator, a checkbook, and a roll of stamps. Neither one of them seems to have attempted to educate themselves about their finances. Other than balancing a checkbook, we can't tell that they even attempt to track their expenses.
They are so financially ignorant that for the last two-plus decades they've invested all their after-tax retirement money with First Command. They knew that they were paying more money for less performance than their shipmates, but they didn't really care because they were saving for retirement and First Command kept them from having to deal with all those yucky financial-management issues.
As First Command hit the skids, they eventually realized that they would have to "do something" and they decided to find a new financial advisor. As they started the asset-transfer process, they met with FC's top sales guy. He helped with the transfer but he let them know that he was also leaving FC to start up his own firm. Without actually violating his non-compete agreement, he managed to leave enough locating data for them to track down his new business and sign up.
They're pulling down over $140K/year in COLA'd pensions with cheap healthcare and living a fairly low-key lifestyle amid some of the world's priciest real estate, but they're unhappy and even a bit desperate. They're both working full-time because they're in their 50s with a 30-year mortgage and barely positive cash flow. The husband, in particular, despises his defense-contractor job-- and she would probably be happy to stop working too. I don't know the numbers but from their experience I suspect they're grossing at least another $120K/year. Yet between work & family they're totally exhausted and overwhelmed.
So in the last few months they've relocated their assets to a new brokerage. The new advisor has given them some good advice-- they've filled out an exhaustive balance sheet and personal cash-flow statement. They've completed (and discussed) an extensive risk-tolerance questionnaire. He's walked them through the paperwork to begin maxing their employer's 401(k)s. They're starting 529s for their kids. Of course there are a million websites & library books that will do all of this for free, but he's an experienced and reassuring tour guide. For a fee.
But when they expressed their mortgage fears to him, he put them into a "mortgage accelerator". The first thing is that DFAS screwed up the transfer of her pension check-- it used to be direct-deposited with a credit union but maybe by next month it'll be direct-deposited into the mortgage accelerator's account. So already they're scrambling to make the minimum payment on a mortgage accelerator. The second thing is that they know they're paying fees but they don't really know how much-- they're just following "their" advisor's directions. The third thing is that they are aware they could hypothetically run their own free version of a mortgage accelerator, but they admit that they lack the confidence to set up a plan and execute it. The worst thing is that they don't really know what happens if they decide to refinance the mortgage or even sell the house. Of course they claim they're never moving.
In August they're meeting with the advisor for the next step of their financial makeover. He wants them to roll over all their money from their TSP accounts into his "professionally managed" IRAs. I can't wait to hear the financial [-]logic[/-] rationalization behind this move. Those who aren't familiar with the TSP may enjoy the July 2008 newsletter, which this woman has promised to read: http://www.tsp.gov/forms/highlights/high08c.pdf
The kids, living among friends & peers whose parents are flat-out stinkin' rich, are also blissfully ignorant. The housecleaner was let go for the home renovation, but now they're agitating for a replacement. Their parents are actually considering this, but they're imposing the "harsh condition" that the kids have to pick up everything off their bedroom floors before the housecleaner's visits. One kid's activity (a school golf team) costs $900-- and whatever it's for, I sure hope it covers the entire season. Neither kid does their own laundry, has an allowance, or runs a checking account-- let alone a credit card.
We've known this woman for a few months and my spouse learned the above while sharing a couple days of meetings, seminars, & meals. I'm glad they're not lifetime friends, but it hurts to see how much Stupid Tax they've paid. I've probably loaned out a couple dozen copies of Bob Clyatt's books, but never to people in this kind of financial quicksand. I don't think they'd even recognize how his advice would possibly apply to them, let alone lead them out of debt into ER. Heck, to them the "Finances for Dummies" books or the Boglehead's Guide would seem like a doctoral thesis.
Spouse and I are going to continue our low-key attempts to boost their literacy. But geez... at this stage of their lives, it's hard to argue with the price they're paying. Right now they're just too dangerous to try it on their own-- and although they're anxious about their mortgage, they have absolutely no interest in learning how to handle their finances.
If you recognize yourself in this post or if you have a seven-figure mortgage and a mortgage accelerator-- tell us what you're doing about it!
They have yet to take me up on anything.
