Couple want to save the Earth and money for their child’s future

Eric and Dana Ellis built a house near Mammoth Lakes that uses natural straw-bale insulation to cut way down on heating and cooling costs. The couple, both of whom work for the public school system, grow as much of their food as they can and buy clothes for themselves and their 9-year-son, Orion, at thrift stores.

Still, they worry that their future finances — including college for their son and then, eventually, retirement — might be built on a house of straw.

“My biggest question is, are we going to go broke sending Orion to college?” asked Eric Ellis, 45.

“It almost seems unmanageable,” Dana Ellis, 48, said.

In recent years, the Ellises spent so much time and energy building their low-impact dream house that they haven’t focused enough on the future, said Los Alamitos-based financial planner Delia Fernandez.

“I don’t want to find that in retirement you have to give up the house you worked so hard for because you’re a little short on money,” Fernandez said when she met with the couple.

The family’s main source of income is the $65,622 annual salary Eric earns as a high school math teacher in the Mammoth Unified School District. Dana brings in an additional $13,000 a year as a special-education teacher’s aide for middle-school children.

They have $40,000 in nonretirement savings, carry no credit card debt and own their cars outright.

They owe $270,300 on their two-bedroom home in the small town of Swall Meadows, about half an hour’s drive from the town of Mammoth Lakes. That figure would have been higher, but they did much of the work on constructing the house themselves.

Completed in 2005, the house could now be worth $350,000 to $400,000.

“This is our forever house,” Dana said. They even kept in mind the possibility of becoming infirm as they age. “We built it with one story so we can just roll in our wheelchairs,” she said.

The environmentally friendly straw-bale-construction method — in which thick walls are built around the bales, which provide insulation — helps keep the 1,200-square-foot home’s electricity bill at an average of about $28 a month.

The Ellises spend about $90 a month on propane for cooking and to heat water.

In addition to buying their clothes, including ski outfits, at thrift shops to save money, they line-dry their laundry outside, even in the winter, when temperatures dip below freezing. They have cut out cable TV, which cost them $40 a month for basic service, and instead used the money to obtain 20-year term life insurance policies: $500,000 for Eric and $300,000 for Dana.

As for vacations, they generally take road trips to visit relatives in Malibu, Phoenix and Missouri, camping in national parks along the way.

“This couple is very disciplined,” Fernandez said.

There’s one major fuel cost that’s not in keeping with their green lifestyle. Mostly because Dana and Eric each commute two hours, round trip, to jobs, they spend a combined total of $250 a month on gasoline.

All told, the family’s expenses add up to about $4,000 a month.

To take care of both college and retirement, the planner advised that the couple save up to $10,000 a year in two Roth individual retirement accounts. The money saved in Roth IRAs can be withdrawn, tax-free, in retirement after years of appreciation.

But few people realize they can also use Roth accounts to pay for their children’s college expenses, given a few restrictions, the planner said.

To that end, Fernandez recommended that the Ellises not put money into 529 accounts, which are designed for college savings. That’s because Orion will probably need financial aid when he goes away to school and some colleges may provide less financial aid to families that have 529 accounts to cover higher-education expenses, the planner said.

Fernandez recommended that the Ellises find a Roth IRA in which they can designate that 60% of their savings be in bonds and the rest in stocks.

The planner estimated that the savings would appreciate by an annual average of 6%. That might seem high during this period of economic blues, but Fernandez based the estimate on the performance of the Standard & Poor’s 500 index and the U.S. bond market over the last 15 years.

Even though that time included major market corrections in 2000 and 2008, the S&P averaged an annual return of 6.45% and U.S. bonds 6.43%.

Based on adding $10,000 a year to the Roth IRAs, Fernandez estimated that the couple would accumulate $330,800 in savings by the time Eric turns 65, even after covering college expenses for Orion.

Fernandez figured college expenses at $16,000 for Orion’s first year, building up to $19,000 in the fourth to account for college costs that increase at about double the rate of inflation. The planner urged the couple not to contribute any more than what goes into the Roth IRAs toward their son’s education.

“People will lend you money to go to college, but not to retire,” Fernandez said. Providing sufficiently for their old age will help their son by relieving him of any financial burden on their behalf.

In retirement, the couple will live mostly on pension income. They anticipate that Eric will begin receiving an annual state teacher’s pension income of $76,993 at age 65 and Dana will begin receiving about $7,300 in Social Security income when she turns 67. Dana will also receive a small teacher’s pension.

Fernandez said she figured the couple could withdraw about $6,000 from their savings during the first year of Eric’s retirement to add to his pension income. They should then increase that withdrawal amount by 3% every subsequent year to keep pace with inflation.

At that rate, their savings should last until Dana turns 97 and Eric turns 94. If they need further living expenses beyond that point, they can tap the equity in their home through a reverse mortgage.

For purposes of comparison, Fernandez calculated that if the Ellises managed to save only $4,000 a year until their retirement, their expenses would outrun their income when Eric turns 75 and Dana turns 78. This could force them to resort to a reverse mortgage early on, or even selling their home.

The couple’s investment in sustainable living could be a big help when they are older. “The demand for natural resources is only going to go up and up,” Fernandez said.

After hearing all the planner’s advice, the Ellises said they believed they could handle saving $10,000 a year, in part by deferring further projects to improve their house. Finishing the master bathroom will just have to wait.

“We’ve saved more than that before,” Eric said. “If we have our goals and stick to them, I think they can really enrich our lives.”

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