Single dad changing careers, unsure of financial future
Three sons are a priority for a former science teacher going back to school to retrain.
Special to The Seattle Times
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Much of what Andrew Carr knows about personal and family money matters he learned from his father.
“My dad was very responsible,” says the 48-year-old Seattle father of three. “He modeled well for his five kids. He showed me how to keep a filing system, be careful with credit cards and live within your means.”
But after a recent divorce, Carr worries that many of his father’s basic financial lessons might be too old-school for his new life as a single parent.
Once a science teacher, Carr has been out of the full-time workforce since 2001 when the couple had what he calls their parenting “epiphany moment.” With his wife launching her medical career, the two agreed that it made financial sense for him to stay home raising their children — sons now ages 11, 7 and 4.
Since then, he’s been “playing with LEGOs, making lunches, chaperoning school field trips, supervising homework, reading bedtime stories and teaching them how to save at least a part of their birthday gift money.”
Now, after 11 years as a married stay-at-home dad, Carr says he needs to chart a new financial path.
“I know there are a lot of stay-at-home moms who have gone through something like this, but dads can find themselves in the same situation,” says Carr, who now shares custody of his boys with his former wife. “My family has had some changes, so I have to change with that.”
His goals: to train for a new career in accounting or bookkeeping and create “a financial plan that allows me the means and flexibility to maintain my relationship with my three boys.
“When I was young and a starving actor, working two jobs and making $500 a month, my parents were there for me when I stumbled and fell,” Carr says. “That’s why it’s always been important for me to be there emotionally for my boys. To be that rock. To be a morally good man and help them make good choices.”
To accomplish that, he completed an online survey to participate in a free financial makeover with a member of the Puget Sound Chapter of the Financial Planning Association.
The result: Carr connected with chapter member Len Skiena, a certified financial planner and vice president with Mercer Island-based S.R. Schill & Associates to review his fiscal status.
He received in the divorce a “generous settlement through 2015,” Carr says. After that expires, he should receive $14,400 in annual child support, which will drop off gradually as his kids near age 18. There is also about $179,000 for him in an Individual Retirement Account.
“I know my money problems are luxury problems, ones that I’m fortunate to have,” Carr says. “I am blessed. Nonetheless, they are still problems that I need help solving.”
With $35,000 in student debt, an $8,000 car loan, $3,500 on a department-store credit card and up to $15,000 he might owe in 2012 taxes since the divorce, Carr says “I know where all my money goes. I just don’t like where it goes.”
Skiena, meanwhile, isn’t uncomfortable with Carr’s spending — but says he is “concerned about his looming near-term debt obligations and his lack of nonretirement savings.”
So, first up: canceling his life-insurance policy.
This quick move is something Skiena calls “a no-brainer. Carr’s ex-wife now provides financial support for the kids, and it’s not necessary to insure against the loss of Andrew’s income, so he can save $1,600 a year.”
The next step, he says, is for Carr to pay off the credit card, which will soar from its current zero interest to 25.6 percent early next year, and the taxes he will owe the IRS in April.
“These two balloon payments represent (Carr’s) own personal ‘fiscal cliff,’ ” Skiena says. And tapping into his IRA is not the answer.
“Burning through his retirement assets is a problem in two ways,” the planner warns. “First, it removes an opportunity for further tax-deferred growth on the asset. Second, removing more money from retirement plans requires additional taxes and penalties to be paid on the money that was taken out of the IRA. These additional tax expenses mean he is burning through his assets even faster.
“Given that, my recommendation is that he is better off making sure that he pays off the credit card on time and working with his tax professional to set up a payment plan with the IRS for the tax bill,” Skiena says. “Setting up an installment plan with the IRS will reduce his monthly penalty by half. Though he will still owe interest, it is well below what the credit-card company would charge him.
“If he (Carr) has less than $10,000 of debt; will pay it off in three years or less; does not currently have an installment agreement with the IRS; can prove that he can’t make the payment immediately, and has filed on time for each of the last five years, then the IRS is obligated to accept the installment plan,” according to Skiena.
Once these debts are paid off, Skiena wants Carr to start saving money in a savings or money-market account “to have a cushion of about six-months expenses’ worth of emergency cash.”
Typically, he continues, the savings “‘rule of thumb’ is three to six months of expenses, but for Andrew — who is making a career change and entering a new industry and who doesn’t have a partner’s income to fall back on should he find himself out of work — it would make sense to lean to the longer side of that range.”
While Carr is back in school and before he secures his next job, the student loan can be deferred, so that debt is not high-pressure.
Next, Skiena says, he needs to start investing future savings in a portfolio of roughly 75 percent stocks and 25 percent bonds, using diversification to reduce portfolio volatility.
After the two men discussed a retirement target age, Skiena recommended Carr shoot for age 71. This, he says, benefits Carr in two ways: Gives more time to accumulate assets; and he reduces the number of years his assets have to cover.
On top of that, Carr may be able to take advantage of a seldom-used and little-understood factor in the Social Security system.
“When he reaches age 67 — his full-retirement age for Social Security purposes — he can begin to take a benefit equal to half of the benefit on her [his ex-wife’s] income, as long as she is eligible for Social Security benefits, which she will be. He can then later switch to his own benefit when he reaches age 70,” Skiena says.
“By doing that, he is not starting the clock on his own benefit, so it will not be reduced by taking it early,” he continues. “Also, even though he is continuing to work after full-retirement age, the benefit reduction for having additional income while receiving Social Security is only for income earned while receiving benefits prior to full-retirement age.”
While money issues were important to Carr, Skiena emphasizes that both men recognized that “not all his goals are financial. Many revolve around his family.”
“He’s probably better off using the freedom that the settlement provides to allow him to have time with his kids while he goes back to school and prepares for his new career, rather than trying to get a part-time job while he furthers his education,” says Skiena. “For the kids and for him, that connection is so important.”