She’s saving up for a permanent vacation
If Elizabeth O’Keefe is anything, she’s a minimalist.
For more than a decade, O’Keefe, 55, has lived in a Silver Lake apartment that’s just 450 square feet -- the size of some walk-in closets.
To conserve energy, she hangs her clothes out to dry in the morning sun. She avoids turning on the heater in her apartment, instead lighting an array of large candles to cut the chill on winter nights.
When her television broke, she began listening to her cherished Dodger baseball games on the radio.
“I don’t have a lot of baggage,” says O’Keefe, who works as a personal assistant for a film executive. “I could probably pack up and move in a couple of days.”
That’s exactly what she wants to do. O’Keefe yearns to move to the lush Waipio Valley on the Big Island of Hawaii. Her dream: Buy a getaway, rent it out for five years and then relocate there.
Aside from craving a change of pace, she’s also desperate for the income-tax deduction that comes with a mortgage.
“Los Angeles is starting to bother me,” says O’Keefe, who lived in Hawaii in the 1970s and raised her son there. “I’m ready to leave.”
O’Keefe makes $73,000 annually. She has stashed away $112,000 in certificates of deposit and holds $213,000 in individual retirement accounts. in case of financial emergency, she keeps $15,000 in money market and checking accounts.
Thanks to her lean lifestyle, O’Keefe hasn’t racked up any debt. She takes books out at the library rather than buy new hardbacks. When she lived in Hawaii, she saved money on high-priced island groceries by buying powdered milk. And she holds on to cars for a least a decade. Her Toyota 4Runner is 7 years old, but it’s paid off.
Her rent -- just $700 a month -- also helps her keep expenses low.
But is O’Keefe financially ready to say aloha to homeownership?
Covering the mortgage
“I don’t recommend it,” says Carol Grosvenor, a fee-only certified financial planner and owner of CG Financial Services in Los Angeles, who reviewed O’Keefe’s finances.
Part of the problem, Grosvenor says, is that O’Keefe would find it tough to make enough rental income on a Hawaiian home to cover her mortgage on the property.
Recently, O’Keefe toyed with the idea of buying a home in Hawaii for $442,000 -- just shy of the $460,000 median price for Big Island properties.
Her plan was to put down $100,000 and take out a 30-year-fixed loan with an interest rate of 6.75%. Her real estate agent estimated rental income at $1,100 a month. But mortgage, insurance, maintenance and property taxes would have run close to $1,800, putting O’Keefe deep in the hole every month.
Grosvenor also cautioned that O’Keefe could lose even more money if she couldn’t find a renter and the house stayed vacant. What’s more, as a longtime renter, O’Keefe might struggle taking on the new role of absentee landlord, Grosvenor says.
“It’s a yellow flag that she’s never owned property before,” she adds.
What about that coveted tax deduction? As a landlord, O’Keefe couldn’t deduct the mortgage interest payments on the property. She could write off only her rental losses, which would add up to just $8,500 annually.
“She’s a pretty typical middle-income American without many deductions,” Grosvenor says. “There isn’t anything left for her to do in the tax code.”
Grosvenor’s advice: Ditch the dream of renting out an island home. Instead, O’Keefe should rent a home after she relocates or at least wait until she’s moved to the island to buy.
By waiting, O’Keefe may miss out on some prime properties. But in the meantime, she’ll continue to build her savings. When she does island-hop, she’ll have a little more to bank on in retirement.
O’Keefe’s confident about finding work on the Big Island, but she anticipates making half her current salary once she relocates. An adventure traveler, O’Keefe takes off for weeks at a time to exotic locales such as Vietnam or Costa Rica.
She’d like to work for a travel company in Hawaii. She also could work with her 35-year-old son, who owns a fencing company on the island.
Semiretirement
Whatever she winds up doing, she’ll have to keep on pinching pennies to have enough money to carry her through to old age.
Grosvenor based her plan for O’Keefe’s retirement on the assumption that she’ll move to Hawaii when she’s 60 and work for five more years, earning $40,000 a year.
By age 65, Grosvenor said, O’Keefe could “partially retire” and start living off her investments. But there’s a catch.
She’ll need to supplement her retirement savings by earning $10,000 through part-time work until she’s 75. The aim is, with Social Security payments and her investment proceeds, she’ll have a combined annual income of $40,000 until she’s 90.
More time in L.A.
Before she makes her island escape, Grosvenor said, O’Keefe will need to keep working in Los Angeles for the next five years and take advantage of her employer’s contributions to a work-sponsored individual retirement account.
Meanwhile, O’Keefe needs to diversify her nest egg, which is entirely invested in stocks. Grosvenor recommends that she shift at least 25% of her funds into bonds to protect her from stock market dives.
It wouldn’t hurt, she added, if O’Keefe checked out some books on investing the next time she went to the library or took an investment course to become more knowledgeable about her finances.
As for her plan to buy a Hawaiian home, O’Keefe is still mulling it over. Her agent recently sent her online photos of another island home. But she’s not in a big hurry.
“I don’t think I’ll have any regrets if I wait until I’m there to buy,” she says.
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(BEGIN TEXT OF INFOBOX)
This month’s makeover
Who: Elizabeth O’Keefe, 55
Pay: $73,000
Financial goals: Buy a home in Hawaii now and rent it out until she relocates to the Big Island; reduce taxes, save for retirement.
Savings: $112,000 in certificates of deposit; $213,000 in individual retirement accounts; $15,000 in money market and checking accounts
Debt: None
Recommendations: Don’t buy a home and rent it out -- the rent won’t cover the mortgage and other costs based on O’Keefe’s proposed down payment. Continue to save for retirement and work for five more years in Los Angeles before moving. Once in Hawaii, continue to work part time until age 75 to retire with an annual income of about $40,000.
About the planner: Carol Grosvenor is a fee-only planner and principal owner of CG Financial Services in Los Angeles.
