Parents ask which debts, expenses to prioritize
Dear Liz: We’re a newly married couple with an 11-year-old and hope to have another baby soon. We have $20,000 in emergency savings, $40,000 in investments, $480,000 in retirement funds, $20,000 in low-interest student loans and $43,000 in high-interest credit card debt. If we have another child, we’d like for my wife to be able to stay home. I am struggling with how to prioritize debt reduction, college savings, home improvements and building our emergency fund. I don’t want to tap our savings or investments, as there are often surprises in life and I do not want to be caught short. The problem is that aggressively paying down the debt hurts our cash flow for our other goals.
Answer: It’s understandable that you don’t want to tap your savings or investments, since it’s difficult to build up those funds. But it really makes no sense to carry high-interest debt when the returns you’re getting on these other accounts are probably much lower.
Talk to your tax pro about the implications of selling some or all of your non-retirement investments, though. If your investments have gained substantially in value, you’ll want to factor in the tax bill or consider selling some of your money-losers instead.
Once the credit cards are paid off, some money that used to go to those payments will be freed up for other goals.
Your priority needs to be saving for retirement. Once you’re on track there, you probably should focus on rebuilding your emergency fund to equal at least three and preferably six months’ worth of expenses. You may not be able to accomplish that before your second child arrives, though, so consider opening a home equity line of credit as a proxy for a larger emergency fund. Leave the line of credit open and unused, however, because racking up a balance would defeat the purpose.
Saving for college is a worthy goal, although it shouldn’t take priority over retirement, paying off toxic debt or having an emergency fund. You may not be able to save enough to pay the whole bill, but you can shoot for saving one-third or half the expected cost, and your child can use federal student loans for the rest. SavingForCollege.com has a calculator to help fine-tune your plan. Even if you can’t save as much as you’d like, you should save something. Even $25 a month over time will help reduce the amount your child needs to borrow.
Home improvements should be last on your list of priorities, and you should try to pay for those with cash. They are not an investment in your home — although they may improve the value somewhat, you’ll typically get back less than 70% of what you spend.
Health insurance for expatriates
Dear Liz: I read your answer about how Social Security payments can be sent to Americans who retire to other countries. You failed to mention that Medicare coverage is generally not available overseas. For many retired people, medical coverage is more important than Social Security coverage. Is there a way to address that problem for Americans who want to spend their retirement years abroad?
Answer: The good news is that many countries (although obviously not all) offer high-qualify healthcare that’s less expensive than in the U.S. Still, it’s smart to have insurance coverage.
Kathleen Peddicord, author of “How to Retire Overseas,” says you typically have two options: in-country and international policies. In-country policies tend to be less expensive (some cost as little as $100 a month) but may be tough to qualify for if you’re in your 60s or older. International policies are more expensive but you can qualify as a new client if you’re younger than 75. Furthermore, international policies will cover you if you move from country to country; an in-country policy won’t.
As you research your retirement destination, contact expatriates who live there to ask about their health insurance coverage, as well as about other details of their lives. You can start with Peddicord’s site, LiveandInvestOverseas.com, but also check out International Living (internationalliving.com and find country-specific sites by typing the name of the country and the word “expat” into an Internet search engine.
Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or via the “Contact Liz” form at asklizweston.com. Distributed by No More Red Inc.
