Reader Mailbag: The Big Christmas Run-Up

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Retiring at age 50
2. Return to work or not?
3. Handling an inheritance
4. Christmas games
5. Money and relationships
6. Housing predicament
7. Pie options
8. 40/30/30 question
9. Wanting frugal gifts
10. Sleep remedies

The days leading up to Christmas are always filled with excitement and energy. There are tons of little things to remember, checklists to fulfill, items to wrap and prepare, and last-minute emergencies to handle.

I’m actually thankful that Christmas comes just a little bit after the shortest day of the year (December 21). It gives us something to occupy our minds when the days are grey and very short.

Q1: Retiring at age 50
I’m 31 and I have a goal of retiring at 50. Like any other goal, I have a realistic plan to make it happen, and metrics to track my progress.

We’re a family of 5 and our monthly expenses are about $8k/month. I figure when the kids leave the house, it’ll be around $5/month (in today’s dollars).

Our current retirement savings are in the low 6-digits. 401k and Roth IRA, invested in Vanguard’s Target Retirement 2040 Fund. I add about $25k per year, depending on how much I can bring in. The IRA is maxed out, and the 401k is funded well beyond my employer-match level.

My question is what investment strategies/products should I use to “bridge the gap” of about 15 years between when I retire and when I’m able to draw out of my 401k and Roth IRA? (I’m able to draw the principal out of the IRA at any time, right?)
– Cael

Yes, you can withdraw your contributions from your Roth IRA at any time.. That’s certainly one possibility for bridging that gap.

It’s also important to note that you can begin making “retirement” withdrawals from your Roth IRA at age 59 1/2, assuming you’ve had the IRA for five years or more (which you will have). This shortens the “gap” that you’re trying to cross.

If I were you, I’d probably keep saving along the same path that you’re on without changing much at all. If you do reach a point where you think you can make the leap into retirement before a traditional retirement age, then I’d rely on Roth IRA contributions to bridge that gap.

Q2: Return to work or not?
Here’s our situation: our first child, a girl, was born with a rare bone marrow disease. I did not return to my work as an administrative assistant to take her to her many, many doctor appointments. We decided a year and a half ago to try to have a sibling, through in-vitro fertilization, who is a donor match for our daughter in case she needs a transplant (not a likely scenario for her since she’s stable on drug treatments, but certainly a possibility). Insurance did not cover most of it. I am now pregnant and due in April. The enormous medical bills, even with the help of family, have left us with about $12,000 in debt and monthly payments we can’t quite cover on my husband’s salary. It seems like we’re slipping behind, not cutting down the debt. We still allow ourselves very small luxuries (a Christmas present or two, an occasional evening out, even a two-day vacation this Christmas). Do we cut these out entirely, or should I look for work?? I don’t want to leave a small infant with a nanny but hate paying the interest on all this debt. I think the stress of our debt is making me a less fun parent anyway. There is no guarantee I can find a job in this climate, but at least it would help a little towards dragging us out of this mess we’re in. Or should we just try to get by, paying just the interest, on our debt for a year until I consider my son old enough to be left at daycare (much cheaper than a nanny)?

– Ellen

Unless you get a job that pays quite well, you’ll be losing money on a nanny for your child. You’ll have to make substantially more than you’d be paying a full time nanny to make that work.

Most people in your situation – a situation not too different than the one we were in not that long ago – usually wind up using some form of daycare for their child. Our experience with our daycare was overwhelmingly positive, but I would highly recommend spending plenty of time finding the right one before putting your child in.

One way to do this is to set yourself a “deadline” for when you plan to enroll the child, then start shopping for one now. Many of the good daycares have a waiting list to get in, so you’ll probably want to get on some of those lists.

Q3: Handling an inheritance
When my father passed away last year, we found out that he had name me, not my mother, as the beneficiary to his IRA. I have a choice of small annual payments until retirement (I’m 37) or taking out all the money now and assume the tax hit. I know that he worked hard at building up the value of the account so that, if he should pass, my mother and I could pay off the mortgage on the house we own jointly and live in. We currently owe approximately $96,000 and his account, before I get hit with both federal and state taxes, is $105,000. After taxes, we expect what’s left from my father’s retirement account to be less than what we owe and will still have a couple year’s worth of payments left to go.

The house is a split level with no bathroom on the main floor. My mother is 70, and we expect her not to be able to navigate stairs by the end of the next decade (as it is now she gets winded sometimes due to her asthema). Putting on an main floor addition of a master bedroom suite would make the house more comfortable for her. We’ve gotten some rough quotes, and such an addition would be between $70,000 and $100,000. Also, there are some other repairs and improvements which need to be done on the house. For example the roof will need to be replaced within the next 5 years, and some of the insullation needs to be replaced as well.

Here’s my question(s):
Where should I invest this money my father left us?
Should we follow his wishes and put it all into the mortgage, and have only a few more years of payments, as opposed to over 20 years? (this would delay paying for any major repairs and/or additions for quite some time).
Should we pay to have an addition put on and make the house more comfortable and practical for her in the later years of her retirement, and take the risk that the addition could cost more than the money we have in hand? (and still have over 20 years of mortgage payments)
Or should we use the money to take care of those major repairs, and put any remaining money towards the mortgage?

I’ve asked friends, family and co-workers what they would do and the responses are all across the board, each with seemingly good rational.

What would you do if you were me?
– Jill

If your father wanted you to put it into the mortgage and you’re sure of his wishes, you should follow them.

The question for me really is whether or not that was really the spirit or intent of his wishes. He wanted the money put into the mortgage, but why did he want that? What you should do with that money is fulfill the why part of the question, and that will probably take some soul-searching.

My guess, based on your story here and similar stories I’ve heard, would be that he wanted comfort and security for his wife and thought you were the best person to ensure that. If that’s the case, you should do what will make your mother’s life the best down the road. Adding a room like this will likely increase the value of the home significantly, so when you do eventually sell it, you’ll be able to pay off the mortgage and have some left over.

Q4: Christmas games
In past years, our family has had Christmas at my mom and dad’s house. This year, we made a family decision to have me and my wife start hosting Christmas to take some stress off of my parents.

One of our family’s traditions is to play some board and card games in the afternoon on Christmas day. We usually play Monopoly or Risk or bridge. We have a deck of cards, but no other games. I thought it might be fun to have some different games to play with my family instead of these old classics. I know you play a lot of these games. Any suggestions?
– Randall

One interesting option might be to pick up a copy of Risk Legacy. This takes Risk and adds some interesting twists to it in that you actually customize the game as you play it. For the first fifteen games, everyone who plays it is involved with actually modifying the game through small gameplay changes, the naming of continents, and other such things. It’s really fun – my wife and I are playing this with a group of our friends right now. This would take the classic feel of Risk and add a new twist to it.

There are a handful of really great games that I recommend to almost every family: Ticket to Ride, Carcassonne, and Settlers of Catan immediately come to mind.

Honestly, you might want to also just have copies of the classics, too. Games are really about socializing, and well-played games have a lot of nostalgia to them, which is a wonderful socializing spur. You can often get these classics at thrift stores for a dollar or two, though I suggest buying two copies just so you can be sure you have all of the pieces.

Q5: Money and relationships
You always seem to have similar goals to the ones I aspire to in life. And you seem to have found a perfect soul mate for this. I am French and live abroad, though I aspire to come back soon and start a life there, and a family. I am just over 30 now, and really envy people who found a perfect match at 23, have a mortgage and other financial goals together with a spouse, like fixing up a house or investing towards financial freedom. I sometime feel like when I save money or plan financial things it would be so much easier to be a couple.

I own two properties, and they rent nicely. I do freelance writing for a living but have come to a point where I do not need that income to live. My dream is to find someone like minded and be able to dedicate all this freedom to raising children, I am even considering homeschooling, and other activities that would be a real perk to a man who wants to invest in his career, like fixing up the house, optimizing meals, and so forth, so we could easily live on one income and have a happy family.

I have been on relationships before who lasted anything from a few months to a few years but every time I felt like the financial agreement would fail us and ended the relationship. Any advice on that? I read that every relationship success, whether business, family, friends, or love, was based on a sound economic agreement. Yet I have a hard time when I start dating someone putting the finances on the table to see if we are bound to have a future.

It is taboo over here, or when I say I dream of being a housewife and raising my children they look at me like a 50s wannabe wife or like I want to take advantage of their income to live for free (I am very independent, financially from my parents since I am 17, graduated debt free with grants, have about 200K net worth before turning 30, and able to maintain myself without incurring any debt, pay my credit card and loans in full each month and so on). I have thought about turning to church to find a christian man since those values are important, but not being very religious myself I am afraid we would have disagreements on that topic.

What are your thoughts?
– Susan

I don’t think finances need to be on the table at the start of a relationship. However, when a relationship becomes serious enough that both parties are entertaining thoughts of joining their lives together, then finances should be brought up.

Communication is always the key. If you’ve communicated a lot with this other person and you feel your relationship is strong, bring up how you feel and talk it through. That’s always the best approach in a relationship.

As for looking for someone who would respect you in the housewife role, you’re right that a Christian church might be a good place to start. However, if you’re finding that dating someone of a particular religion is going to bring up other problems, you probably shouldn’t seek someone there. Seek out groups that match your values in some ways, then look for individuals in those groups that match your values in other ways. It’s all about the filtering, and it takes time.

Q6: Housing predicament
My wife and I currently live in condo that we have a mortgage on. We purchased 4 years ago, rate is 5%. We purchased for $140,000 and have about $135,000 remaining on the mortgage. When we purchased the condo we took the $7,500 housing grant that we have to pay back over a 15 year time period or when you sell the house. The stipulation is if you do not make a profit then you don’t have to pay this back. We have already paid back $1,000 of this. The purchase price is adjusted for any improvements or commissions you have paid in the process. We put in more than $10,000 of improvements so if we were to sell for anything over $143,500 we wouldn’t have to pay back any of the remaining grant. We could also choose to rent, which is what I would do if we didn’t take out the grant, but if we were to do this we would have to pay the remaining balance of the grant back at that time since it is no longer our primary residence. This was the $7,500 home buyer credit, not the $8,000 that you don’t have to repay and can rent after 3 years.

So our current situation, my wife and I are both 27 have no debt (no credit card, no student loans) besides our mortgage and 2 car loans. Car 1 – 1 year remaining $250/month, Car 2 – 2 year remaining $350/month. We make a combined $115,000/year. We currently put about $1,000 a month in retirement (+ company match) and have a combined $40,000 currently saved in our retirement. We also have $10,000 in our savings for a future down payment on our house. We are expecting our first baby in February and at that time my wife will take off 12 weeks of work, she will get 50% pay during this time. I am going to lower my retirement to just the company match during this time period to make sure we have enough money, although I think we should be fine and and will increase the retirement once she goes back to work. We will be incurring day-care costs once she goes back to work of roughly $800 per month.

Here is our delimna. We have our condo currently listed at $144,000 however we may only be able to get $135K or even less for it, which after commissions would barely break even on our mortgage and could possibly even take a little loss. We want to continue to save and build our savings account up to around $15K before we buy our new place. For us to do this we can’t really afford to lose that much when we go sell. The condo we are living at will probably be too small once the baby gets to about a year old so we are looking at houses in our area at around $200-$250K, (I realize we wouldn’t have 20% down but this is what we are wanting for now). We also want to take advantage of the lower interest rates that are currently in affect right now (I personally believe they will be low until 2013).

Looking back I now realize we should have probably just rented 4 years ago but hindsight is 20/20. Anyway, I guess our options are stay in the condo until we can get a buyer that is willing to give us a decent offer, take a loss on our condo and not have as much to put in a downpayment, or pay out the remaining grant and rent out the condo ourselves until the market turns around in our area (this would also lower our down payment).

It is frustrating because I feel like we are responsible with our money and didn’t necessarily do anything incorrect yet we may end up losing money on this decision to buy our first place, however I realize this is just the times we are living in and going forward I will think more indepth of our decisions. Any advice would be greatly appreciated.
– Jim

You didn’t do anything incorrectly other than not prophetically predict what the housing market was going to do. You made a move based on the information you had at the time and you’re largely responsible with your money. Don’t be frustrated with yourself.

If I were in your shoes, I would stay put for the time being and make it work with the child for as long as you possibly can. Sarah and I shared a very tiny apartment with our first child until he was almost 2 and our second was on the verge of arriving. If it weren’t for that second child, we might still be living there.

This will allow you to not only save for the down payment for the house you want to buy, but will also allow you to get more and more above water on your condo. Even if you don’t time the market perfectly, if it begins to rebound, your condo will also go up in value, meaning the rebound won’t hurt you as badly as you might think.

Q7: Pie options
Is it less expensive to make your own pies or to buy them from a good baker? I don’t like to buy some of the cheaper pies because they taste artificial but there are several bakeries around here that make good pies.

– Linda

Sarah and I have made quite a few pies over the years. My experience has been that a truly great homemade pie takes about two hours of work and uses between $10 and $15 in ingredients, assuming you have very little of the ingredients on hand. A simpler homemade pie – one with a pre-made crust – can be done in much less time, but isn’t quite as good.

So, how does that compare to pies that you might purchase? There’s a bakery here that sells pies that are roughly as good as the pies we can make with a pre-made crust for about $15. There’s one bakery that supposedly sells mind-blowing pies (though I’ve never tried them) for about $20.

You’ll save money by making it yourself, but not enough to make it worth the time unless you really enjoy the process of making pies. I actually do if I’m in the right mood.

Q8: 40/30/30 question
I have a question about the 40/30/30 rule you spoke of in November of last year. You say it basically means you should spend 40% of your income on basic bills, 30% on saving for the future and 30% on enjoying life. But how do you do the math? For instance, if I save $16,500 through my 401(k) at work, that’s money that I never see in my bank account, but it is money that’s going towards saving for the future. So do I just take my net bi-weekly pay, annualize it, add $16.5k to the total, divide by 12 months and then use the 40/30/30 formula on that number to figure out my monthly ‘budget’?

– Regina

That’s what I would suggest doing. I would simply ignore taxes entirely. If I used pre-tax money for savings, I’d just count that normally.

It’s important to remember with things like 40/30/30 that they’re just guidelines to get you moving in a healthy direction. They’re not absolute rules that work perfectly in all possible situations. Almost all personal finance advice is just like that – everyone’s specific situation is different.

If you’re putting $16,500 into your 401(k), you’re probably doing really well with your finances. Keep it up.

Q9: Wanting frugal gifts
I was just wondering if you could give some advice, it’s only a small problem, barely a problem really but I thought you might have an idea that I haven’t thought of. With Christmas coming up presents have been a topic of conversation here and there. My mum has always bought one or two big things for me for Christmas and then a few little stocking fillers (I’m an only child so she always goes a little overboard). The stocking fillers always used to be useful things, socks, underwear, occasionally toiletries. I always loved this, I went through a stage of about four years where I didn’t have to buy my own underwear because I always got new ones at Christmas!

Of late though she’s been buying more trinket type things that don’t have any use. It’s not that I mind her buying things like that, it’s more that I feel bad that she’s spending money on something that is just going to get (eventually) thrown out because I have no use for them. I think she’s doing this because I’ve become more frugal over the past few years and she thinks I’m depriving myself, when the truth is I just laugh at the prices they put on things that have (in my mind) no value. Any ideas on how I could suggest to her that I much prefer the socks and undies route? I’ve tried commenting how awesome it was when she was doing the socks and underwear thing but that didn’t work.

As I said, it’s not a huge problem, it’s not that I mind that much getting those sort of things, I know that the thought is there, it’s more that I feel bad that she’s essentially wasting her money.
– Lauren

I think the key is communication, but I wouldn’t do it right in the face of the Christmas season.

Accept whatever you get this year, then have a conversation about this in April or in June or in September. Sit down with your mon and simply say that you actually do not want a lot of those “trinket”-type things. Reinforce it by simply not commenting on or even gently deriding the materialistic things you don’t value outside of the context of gift-giving.

The key is to make sure that you’re not bashing your mother’s gifts. The purpose of this isn’t to hurt her feelings but to make sure she understands what you actually value. Tell her what you value and make it clear to her through your actions.

Q10: Sleep remedies
You almost always seem to have great frugal ideas for life’s problems. My big challenge as of late is insomnia. I often can’t get to sleep until one or two in the morning and when I have to get up at six, I’m exhausted. Do you ever get like this and if you do, how do you deal with it?

– Evan

Whenever I’m having a hard time sleeping, I do two things.

First, I exercise a lot in the morning. Not in the afternoon or evening. The morning. I do something around the house that requires a lot of exertion or I’ll go on a brisk walk or jog for a long while or I’ll go on a bike ride. The key is to really wear myself out in the morning so the endorphins and other responses wear off before bedtime, leaving me with physical exhaustion.

My other tactic is my old standby of warm milk with nutmeg. I just take some milk, heat it until it’s warm (bordering on hot), and sprinkle several dashes of nutmeg on top. This puts me to sleep really well, for some reason.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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