Divorce Needn’t Break Up His Plan to Retire at 50

Ron Althouse’s pending divorce has left him solely responsible for the couple’s $10,000 in loans and credit card debt, and he’s worried it will derail his plan to retire at 50.

“I know compared to most people’s, this debt is just chicken scratch, but compared to my income ratio and my age, it feels pretty big right now,” he said.

Plenty of people would disagree with his fear. Althouse, 29, earns about $48,000 a year--more, if you consider that his employer pays most of his car expenses and that he can expect to earn $4,800 in annual rental income from an extra room in his new townhouse.

Indeed, Toian Bowser-Alexander, a certified financial planner in Pasadena who specializes in divorce planning, said Althouse doesn’t appreciate what a fine position he’s in.

“In absolute terms the debt isn’t that bad--it’s $10,000, not $50,000. Plus Ron has few expenses and no dependents, and should have no problem paying this off and saving for later,” she said.

Althouse and his lawyer decided that although he may have been able to share the marriage debts with his wife, the legal battle might have cost more than the $5,000 Althouse could recover. “Consider this as experience you paid for,” said Bowser-Alexander. “Some debts aren’t worth the time and trouble it would take to avoid paying them.”

That debt won’t prevent Althouse from retiring in 21 years. But with just $1,000 on hand and about $4,000 in retirement accounts, he will need to be disciplined about savings to reach that goal.

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Althouse has always been prudent about money. He worked his way through school to get his degree at Cal State Long Beach while working nights at a restaurant. After graduating, he continued working for a year while surfing on the Pro-Am circuit.

“I did it backwards,” Althouse said. “Usually you drop out of high school to surf competitively, but here I was with a college degree,” living in Hawaii and ready to go on tour. When he realized he could make more money using his degree to get a “real job,” he decided that full-time surfing and traveling would have to wait for his early retirement.

The “real job” Althouse took was a position as a management trainee at a car rental firm’s office in Hawaii. After his marriage deteriorated, Althouse transferred to the firm’s Southern California office, where he works as an account executive.

Back in his home state, Althouse moved into his grandmother’s house on Balboa Island, where he had lived on and off since his parents had divorced 23 years earlier. No sooner had he settled in than his mother and stepfather decided to sell their $170,000 Newport Beach townhouse, and offered it to Althouse for $20,000 less than its appraised value. Suddenly, there was a new question: Should he buy real estate during a divorce proceeding, and if so, how?

Althouse’s grandmother advanced him the money for the $30,000 down payment, and Althouse’s lawyer said the house could be protected from any claims from his wife, partly because he wasn’t buying the house with money earned during the marriage.

“Even using community assets to buy a house during a divorce isn’t a problem if it’s after the property settlement,” said Bowser-Alexander. “But Ron doesn’t have a property settlement yet, so it helps that the down payment came from his grandmother.”

Now settled into the townhouse, Althouse needs to decide how serious he is about early retirement.

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Bowser-Alexander calculates that he will need enough savings to generate 70% of his current income--$37,000 annually in today’s dollars, or $76,000 after figuring modest inflation over the period. Grand total needed in 21 years: $1 million.

Bowser-Alexander said that number is within Althouse’s reach, given reasonable assumptions about future growth and interest rates and given Althouse’s willingness to keep his standard of living about where it is now. These would be the sources:

* 401(k), $500,000. To get this much money in 21 years, he needs to contribute the maximum amount--15% of his income. At his current 5% rate of participation, he’d only have about $170,000. Both figures assume regular raises and about a 9% average annual return. His employer does not match his contributions. Instead, it offers:

* Profit-sharing, $150,000. His employer’s deferred-compensation plan amounts vary from year to year. Bowser-Alexander took Althouse’s current $1,700 annual award and grew it 5% a year, reaching a $4,800 benefit at 50. “I could have assumed more aggressive growth in both the plan and its earnings, but because it’s at the company’s discretion I decided to be conservative,” said the planner. “Who knows what will happen with the company, or whether Althouse will stay long enough to be fully vested in the plan?” Currently, Althouse is 20% vested.

Under current law, withdrawals made before age 59 1/2 from those two tax-deferred employer plans would be subject to taxes plus a 10% penalty. As a result, Althouse might try to rely as much as possible on other sources of income in his 50s.

* Stocks, $5,000. Althouse’s grandmother gave him $570 in stocks--a few shares of Toys R Us and Microsoft. Bowser-Alexander figures they will grow in value about 10% annually.

* Roth IRA, $110,000. Contributing $2,000 a year will produce an account of this size, assuming a 9% annualized return. Of that, the $42,000 of contributions can be withdrawn tax-free and penalty-free in the first years of Althouse’s planned early retirement. After age 59 1/2, all withdrawals will be penalty- and tax-free.

The Roth can also be considered a last-ditch emergency fund right away since it levies no penalties for early withdrawal of your contributions. “Remember, it’s not a watering hole,” warned Bowser-Alexander. “Wait for a true emergency before you turn to that money.”

* Additional savings, $235,000. An additional $4,100 saved each year for 21 years with similar assumptions as above would complete his early retirement nest egg. That may be the first fund he taps in his 50s so that the tax-deferred accounts have more time to grow.

* Social Security. This part will not be available at age 50. But its prospect means he can let his nest egg shrink during his early retirement if he needs more money. Then, at age 67, the standard retirement age for anyone born in 1962 or later, Social Security for Althouse can be expected to kick in about $80,000 of capital value. In other words, his monthly payment would equal the income generated by such an amount. (Because Social Security is based on the 35 years of highest income, Althouse might consider working at least a few extra years in his 50s to increase later benefits.)

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Given Althouse’s new townhouse and overall budget, starting these savings plans may seem daunting. It requires that he save about $700 a month now and more as his income rises.

“It doesn’t include splurges or heavy entertainment spending,” said Bowser-Alexander. “We don’t want you to become a monk, but if you want to retire young, there’s definitely a balance to try for.”

Althouse examined why he didn’t have extra money at the end the month to put into savings and realized two major expenses--dining out and vacations--would have to be reduced. Cutting down on vacations might be particularly tough because Althouse’s favorite splurge is for long vacations to such exotic destinations as Indonesia.

Nonetheless, Althouse intends to adjust his lifestyle.

“I have goals I really want to achieve, so I’ll have to set myself on track with a tighter budget.”

First, as a practical matter, Althouse needs to direct $400 of that $700 a month to create an emergency fund and pay off his consumer debt. That will delay his retirement goal, but it’s a more important first step.

“If something you don’t expect happens to you, such as an illness or accident, you need to make sure you have a safety net in place so you don’t lose assets,” said Bowser-Alexander. Althouse’s company provides generous long-term disability insurance as well as life insurance, so the planner suggested he begin putting aside enough cash to pay his bills for the three months it will take disability insurance to kick in--at least $6,000.

About $3,000 of the debt from Althouse’s marriage is on credit cards charging 21% interest, so that is the first debt Althouse should pay off. Fortunately, the down payment loan from his grandmother does not have to be repaid immediately and may later be partially forgiven, so Althouse has the flexibility to focus on other debts and savings.

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Once Althouse puts his plan into effect, he needs to remain flexible. Tax laws or his priorities may change.

Some events could make things easier--his income could rise, he could get an inheritance or his investment returns could be higher than the assumptions. But he should be prepared for low returns and unexpected problems as well.

Given his long time horizon, Althouse should aim to put most savings into the stock market. For shorter-term funds, Bowser-Alexander recommends a money market fund that allows low minimum contributions and unlimited check-writing privileges for $100 or more, such as the one run by the Franklin Templeton funds.

If Althouse ever considers another job, the planner emphasized that he should calculate the value of all his job benefits. “You are blessed with an employer who gives you free transportation, including gas,” she said.

And if Althouse gets married again? Bowser-Alexander suggests that all marrying couples keep their debts separate, even after the ceremony. “I understand love and all that, but the lesson is that the woman should keep her debts and the man should keep his and when they’re paid off the couple will have theirs.”

Althouse said he understood the planner’s reasoning, but he would make the same decision again. “I thought my marriage was for life, and when I get married again, I will believe that the marriage will last forever.

“So naturally my future wife’s debts would be mine as well,” he said.

Stephanie Losee is a regular contributor to The Times. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053 or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/makeoverform.

Information on choosing a financial planner is available at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.

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This Week’s Make-Over

* Investor: Ron Althouse, 29

* Occupation: Sales and marketing executive

* Gross annual income: About $48,000, plus value of company-paid transportation expenses and potential rental income of $4,800.

Goals

Pay off $10,000 debt and plan for early retirement.

Current portfolio

* $1,000 in savings account.

* About $570 in stocks, five shares of Microsoft and six shares of Toys R Us

* 401(k) worth $3,600

* Profit sharing worth $1,720, now 20% vested

Recommendations

Direct $600 to $700 in monthly savings to:

* Pay off consumer credit loans of about $10,000 in two years.

* Establish emergency fund.

* Open Roth IRA and contribute maximum $2,000 a year.

* Maximize 401(k) contribution to 15%.

Meet the Planner

Toian Bowser-Alexander is a certified financial planner with Financial Network Investment Corp. in Gardena. Her personal office is in Pasadena. Bowser-Alexander works on a fee-only or commission basis depending on the client’s preference.