Long term financial advice for someone with no safety net prospects.
April 20, 2022 10:05 AM Subscribe
I have just turned 40 and am trying to figure out how to best manage my bleak future prospects for personal solvency which are encased in a deeply stressful snowflake described below. The overall context here is that I've finally had to admit that I've been priced out of homeownership in any American city. Certainly not my actual community, where very modest houses are purchased for $900k in cash these days.
Here's the situation I find myself in after stumbling through 40 years of a life.
1. I live in an affordable rent-controlled apartment in Los Angeles. If it gets torn down at some point, I will probably have to move to a different city/state with cheaper rent, so moving is not out of the picture for me entirely.
2. I am single and childless and it is unlikely at this point that I'll have children. I'm sad about that, but here I am. I mention this for both sides of the coin; I won't be spending money on children, and also, the last decade or so of my life will probably be a pretty solitary affair without anyone helping me financially, physically, or emotionally.
3. I currently spend about $150 a month on maintaining the housing situation of one aging parent. I'll be the sole sibling financially responsible for my mother's care as she ages, which will probably be sometime in the next five years.
4. My financial picture is: $13k remaining in student loans, an auto loan a couple months from being totally repaid, and no other meaningful debt. I have $45k in a 401k. I have zero liquid savings. (Cat- and car-related emergencies seem to come for my emergency fund every six months or so the last couple years.) My salary is unlikely to ever tip over past $100,000, just to give a sense of long-term parameters. In the long-term, no one's coming to save me. There's no family wealth or land assets or anything that I'll get a share of when anyone dies. Both parents' passing will be a cost rather than a windfall.
My question is basically what should I be doing in this situation with my money, aside from rebuilding emergency savings? I am just now finally in a place where I can usually put aside $1,000 to $1,500 a month. My assumption has been that I'm never going to have the $100k to $200k that a person needs for a house down payment where I live, and that as a result I should just max my 401k for as long as I work, rather than having considerable liquid savings. But should I be thinking about this another way? I know literally nothing about money other than that it is a stressful thing that goes to college debt and life emergencies.
Here's the situation I find myself in after stumbling through 40 years of a life.
1. I live in an affordable rent-controlled apartment in Los Angeles. If it gets torn down at some point, I will probably have to move to a different city/state with cheaper rent, so moving is not out of the picture for me entirely.
2. I am single and childless and it is unlikely at this point that I'll have children. I'm sad about that, but here I am. I mention this for both sides of the coin; I won't be spending money on children, and also, the last decade or so of my life will probably be a pretty solitary affair without anyone helping me financially, physically, or emotionally.
3. I currently spend about $150 a month on maintaining the housing situation of one aging parent. I'll be the sole sibling financially responsible for my mother's care as she ages, which will probably be sometime in the next five years.
4. My financial picture is: $13k remaining in student loans, an auto loan a couple months from being totally repaid, and no other meaningful debt. I have $45k in a 401k. I have zero liquid savings. (Cat- and car-related emergencies seem to come for my emergency fund every six months or so the last couple years.) My salary is unlikely to ever tip over past $100,000, just to give a sense of long-term parameters. In the long-term, no one's coming to save me. There's no family wealth or land assets or anything that I'll get a share of when anyone dies. Both parents' passing will be a cost rather than a windfall.
My question is basically what should I be doing in this situation with my money, aside from rebuilding emergency savings? I am just now finally in a place where I can usually put aside $1,000 to $1,500 a month. My assumption has been that I'm never going to have the $100k to $200k that a person needs for a house down payment where I live, and that as a result I should just max my 401k for as long as I work, rather than having considerable liquid savings. But should I be thinking about this another way? I know literally nothing about money other than that it is a stressful thing that goes to college debt and life emergencies.
Response by poster: Oh I meant to add that my employer match for the 401k is an automatic $5,000 per year.
posted by kensington314 at 10:33 AM on April 20, 2022
posted by kensington314 at 10:33 AM on April 20, 2022
You could see about Insurance for long term care and/or accidental loss. My job give us access for a few dollars a week. You do not need any kind of life insurance with no dependents and anyone who tries to sell it to you as an investment should be ignored (and shamed). There may be death benefits as part of the accidental loss insurance, but the reason you want it is that it covers injuries like loss of a limb.
Renter's insurance is often pretty cheap - maybe add it to your auto policy.
posted by soelo at 10:49 AM on April 20, 2022
Renter's insurance is often pretty cheap - maybe add it to your auto policy.
posted by soelo at 10:49 AM on April 20, 2022
You could see about Insurance for long term care and/or accidental loss. My job give us access for a few dollars a week.
LTC insurance, if offered at all, will not be cheap like this. More like at least a few hundred dollars a month. Evaluating whether it's even useful is probably too complicated for us here.
You could be a lot worse off, truly. The personal finance flowchart on Reddit isn't so bad, if not exactly one-size-fits-all. I think your basic impulse to put all you can into your 401(k) (index funds) once you've built up a bit of an emergency buffer is correct. Because I, too, live in a place with very expensive real estate and have bounced all around the income scale, the money that might have gone into a down payment in a place where that might have bought me an apartment I wanted instead is in retirement accounts and a regular brokerage account. That money is doing okay; there will be ups and downs, but the same is true of housing prices. While it is not liquid now, it will be liquid in retirement. I will not have to maintain a house on my future-aging own and I should have a pot of cash to meet expenses with. You can't sell a window to pay for a hip replacement, you know? (I do not have complete financial security for my whole life by any means, but almost no one really has that.)
It might be helpful for you to go to ssa.gov and request your Social Security information. The SSA will give you a projection of your likely payment in retirement. That will give you some idea of your starting point in retirement.
posted by praemunire at 11:25 AM on April 20, 2022 [2 favorites]
LTC insurance, if offered at all, will not be cheap like this. More like at least a few hundred dollars a month. Evaluating whether it's even useful is probably too complicated for us here.
You could be a lot worse off, truly. The personal finance flowchart on Reddit isn't so bad, if not exactly one-size-fits-all. I think your basic impulse to put all you can into your 401(k) (index funds) once you've built up a bit of an emergency buffer is correct. Because I, too, live in a place with very expensive real estate and have bounced all around the income scale, the money that might have gone into a down payment in a place where that might have bought me an apartment I wanted instead is in retirement accounts and a regular brokerage account. That money is doing okay; there will be ups and downs, but the same is true of housing prices. While it is not liquid now, it will be liquid in retirement. I will not have to maintain a house on my future-aging own and I should have a pot of cash to meet expenses with. You can't sell a window to pay for a hip replacement, you know? (I do not have complete financial security for my whole life by any means, but almost no one really has that.)
It might be helpful for you to go to ssa.gov and request your Social Security information. The SSA will give you a projection of your likely payment in retirement. That will give you some idea of your starting point in retirement.
posted by praemunire at 11:25 AM on April 20, 2022 [2 favorites]
You should max your 401k yes. You can take a down payment from that if you ever amass enough in there to feel comfortable doing so. You don't mention your current salary, but even in LA, $100k is pretty good. My relatives live there, and make less than that combined many years.
Your 401k also reduces your total taxable income, which will help with state taxes (I think -not a tax professional).
posted by The_Vegetables at 11:58 AM on April 20, 2022
Your 401k also reduces your total taxable income, which will help with state taxes (I think -not a tax professional).
posted by The_Vegetables at 11:58 AM on April 20, 2022
Oh yeah - your student loans - since you don' t have any dependents [no need to pay for extra housing, medical or educational for them], feel free to pay that off as slow as you feel comfortable doing so.
posted by The_Vegetables at 12:00 PM on April 20, 2022
posted by The_Vegetables at 12:00 PM on April 20, 2022
Do you have any of your retirement savings in a Roth IRA? Having both a 401(k) and a Roth can really help with the tax aspect when you retire, as the gains are exempt from federal tax. An additional bonus is that after 5 years you can withdraw your initial investment without penalty if you have a serious need. Withdrawing from a 401(k) early has a penalty and you'd need to pay tax on the money withdrawn.
posted by citygirl at 12:03 PM on April 20, 2022 [1 favorite]
posted by citygirl at 12:03 PM on April 20, 2022 [1 favorite]
You should max your 401k yes. You can take a down payment from that if you ever amass enough in there to feel comfortable doing so.
Don't count on this without looking into the details. I've considered this recently. I'm past the age of having to pay penalties, but if I took out money for a downpayment now, it would be taxed as income.
posted by FencingGal at 12:04 PM on April 20, 2022
Don't count on this without looking into the details. I've considered this recently. I'm past the age of having to pay penalties, but if I took out money for a downpayment now, it would be taxed as income.
posted by FencingGal at 12:04 PM on April 20, 2022
Definitely first max out your Roth IRA and then put as much as you can in 401k. You won’t benefit that much from the immediate tax savings of the 401k, and the Roth is much more liquid (in addition to saving you taxes in retirement). I’m assuming your funds are all low fee and so on, but if not, the target retirement funds are usually the best way to go.
You’re not in bad shape at all. Owning a house can be a huge risk and time sink even if the down payment magically appeared. You just need to focus on having enough in retirement savings to afford rent and senior care during your retirement. You may realistically need to move out to a lower cost of living area in the US to do that.
posted by redlines at 12:39 PM on April 20, 2022 [1 favorite]
You’re not in bad shape at all. Owning a house can be a huge risk and time sink even if the down payment magically appeared. You just need to focus on having enough in retirement savings to afford rent and senior care during your retirement. You may realistically need to move out to a lower cost of living area in the US to do that.
posted by redlines at 12:39 PM on April 20, 2022 [1 favorite]
i am in nearly the same situation as you. 42, no kids, no siblings, aging parents. i live in a lower COL area, but it is still unlikely i will ever be able to afford a house.
my personal plan was that i paid off all of my debt first, because all of my debt was a higher interest rate than i was earning in any savings account. and i didn't like the psychological hit of it "hanging over me." once my debt was paid off, i started shoveling everything "extra" into my emergency savings account. some months there is more extra than others depending on new tires or cat dental extractions, etc. once i have my emergency savings at a level i am happy with, i will start shoveling all the "extra" into maxing out my (non-employer-matched) 401k, and then a brokerage account or some other investment thingie (i will meet with a financial advisor when the time comes).
being able to save $1000 a month is GREAT! i was not in a position to be able to do that until about the end of 2021. if you are able to invest some or all of that, it will be a boon down the road.
others would likely advise shoring up your emergency savings then paying of student loans as they are likely lower interest, but that just stressed me out too much.
posted by misanthropicsarah at 12:40 PM on April 20, 2022 [2 favorites]
my personal plan was that i paid off all of my debt first, because all of my debt was a higher interest rate than i was earning in any savings account. and i didn't like the psychological hit of it "hanging over me." once my debt was paid off, i started shoveling everything "extra" into my emergency savings account. some months there is more extra than others depending on new tires or cat dental extractions, etc. once i have my emergency savings at a level i am happy with, i will start shoveling all the "extra" into maxing out my (non-employer-matched) 401k, and then a brokerage account or some other investment thingie (i will meet with a financial advisor when the time comes).
being able to save $1000 a month is GREAT! i was not in a position to be able to do that until about the end of 2021. if you are able to invest some or all of that, it will be a boon down the road.
others would likely advise shoring up your emergency savings then paying of student loans as they are likely lower interest, but that just stressed me out too much.
posted by misanthropicsarah at 12:40 PM on April 20, 2022 [2 favorites]
Definitely first max out your Roth IRA and then put as much as you can in 401k. You won’t benefit that much from the immediate tax savings of the 401k,
This is not at all clear, I mean in terms of 'financial science' not in this particular case. The difference between a tax-advantaged account (with a 401k or regular IRA) vs a paid-tax already ROTH is generally just a few dollars over the life of the funds for a generalized person.
ROTH do offer easier access to your invested portion (because you already paid taxes on them) than a 401k or regular IRA. These are bigger factors than when you pay tax.
posted by The_Vegetables at 1:08 PM on April 20, 2022 [1 favorite]
This is not at all clear, I mean in terms of 'financial science' not in this particular case. The difference between a tax-advantaged account (with a 401k or regular IRA) vs a paid-tax already ROTH is generally just a few dollars over the life of the funds for a generalized person.
ROTH do offer easier access to your invested portion (because you already paid taxes on them) than a 401k or regular IRA. These are bigger factors than when you pay tax.
posted by The_Vegetables at 1:08 PM on April 20, 2022 [1 favorite]
Re: Roths. Yes, to be clear, I was talking about this particular case, especially with regards to liquidity, and the current tax bracket.
posted by redlines at 1:19 PM on April 20, 2022
posted by redlines at 1:19 PM on April 20, 2022
Where does your mom live? Is building an ADU in the backyard an option? (If she happens to be in LA, the city allows tiny houses on *wheels*, which are much cheaper than regular ADUs.)
I would try to get permission to work remotely at your current job, if you don't have it already, or look for a new remote job, and then start hunting for a cheaper place to invest in a little house, assuming that your rent now is not so cheap that a mortgage somewhere else would cost less.
posted by pinochiette at 2:37 PM on April 20, 2022
I would try to get permission to work remotely at your current job, if you don't have it already, or look for a new remote job, and then start hunting for a cheaper place to invest in a little house, assuming that your rent now is not so cheap that a mortgage somewhere else would cost less.
posted by pinochiette at 2:37 PM on April 20, 2022
After 401k max and roth what about
treasury bonds? Someone correct me if I'm wrong but I believe in twenty years ibonds and ee bonds should approximately double, so if you put in $500 a month now you can pay future you $1000 a month. Treasury.gov lists the differences between the types of bonds. I believe you can redeem ibonds after 1 year so they are a good emergency fund.
Rental insurance is impt if you dont have it. If your home becomes uninhabitable it can pay for temporary lodgings. Check the exclusions.
I would also consider buying a parcel of land in a cheaper part of the country, somewhere you can build a small home in 20 years time.
posted by jello at 4:57 PM on April 20, 2022 [1 favorite]
treasury bonds? Someone correct me if I'm wrong but I believe in twenty years ibonds and ee bonds should approximately double, so if you put in $500 a month now you can pay future you $1000 a month. Treasury.gov lists the differences between the types of bonds. I believe you can redeem ibonds after 1 year so they are a good emergency fund.
Rental insurance is impt if you dont have it. If your home becomes uninhabitable it can pay for temporary lodgings. Check the exclusions.
I would also consider buying a parcel of land in a cheaper part of the country, somewhere you can build a small home in 20 years time.
posted by jello at 4:57 PM on April 20, 2022 [1 favorite]
Definitely first max out your Roth IRA and then put as much as you can in 401k.
Not with $5K matching from the employer!!! That match needs to be gotten first. Indisputable.
posted by praemunire at 5:00 PM on April 20, 2022 [6 favorites]
Not with $5K matching from the employer!!! That match needs to be gotten first. Indisputable.
posted by praemunire at 5:00 PM on April 20, 2022 [6 favorites]
The main benefit that owning a home gives you financially is that you need a slightly lower retirement pot as you don't need to make mortgage payments once it is paid off, but without an owned home, you will always need to make rent. For that reason, I concur with you and everyone else that beyond paying off loans and a decent emergency fund, it makes sense to put spare $ into retirement savings. This should include your 401(k) match as a priority. You have 25-30 years until retirement, if you use a target investment fund and invest around 20% of your salary into retirement funds you'll probably be ok. If you can't manage that amount get as close as you can.
posted by plonkee at 10:51 AM on April 21, 2022
posted by plonkee at 10:51 AM on April 21, 2022
This thread is closed to new comments.
/r/personalfinance on Reddit has a pretty good wiki for this topic (see the flowchart at the top):
https://www.reddit.com/r/personalfinance/wiki/commontopics
posted by justkevin at 10:22 AM on April 20, 2022 [2 favorites]