Becoming Debt-Free and Savings-Rich

Shaun: So I was raised by a single mom with a big heart who had me in her first year of college and she did her best, but she didn't really know much about finances, short of just paying her bills. And so learning about finances, meaning investing and saving and budgeting and things like that - that's not really information that I grew up with.

Jean: Hi everyone. I'm Jean Chatzky, and you're listening to AARP’s Closing the Savings Gap, brought to you by Fidelity Investments. You might have seen me on the Today Show or listened to the HerMoney podcast. I'm also proud to be AARP's Financial Ambassador.  On the next seven episodes, we'll be talking to real women as they work to close the financial gap holding us back in retirement. This is the gap between the income we're on track to draw from our savings and social security, and the amount we're going to have to spend on essentials like groceries, healthcare, and housing. It can be a big gap, especially for women who earn just eighty cents on the dollar compared to men. By age 60, we've earned a whopping $1,000,000 less than our male counterparts on average, and then, because we live a half decade longer, we have to figure out a way to make that money last. Closing the gap may sound daunting, but it is not impossible. Over the course of this series, you'll meet women who have a retirement gap because of a common financial roadblock. It could be debt, overspending, undersaving, lack of confidence when it comes to investing. Don't be surprised if some of these stories sound familiar. My team has matched each of these women up with a financial planner who's taking them by the hand and helping them make the changes they need to retire with confidence, and so that you can do the same.

Jean: On this episode, we're going to be looking at a common problem. Just 39 percent of Americans would be able to cover a $1,000 emergency if something unexpected happened. That is a huge number of people, and here's why it's problematic. When we aren't prepared, we're more likely to pull out the plastic to cover emergencies, digging ourselves into an even bigger hole. What's the solution? Budgeting. Less than half of Americans do it, but planning your spending - which is what budgeting really is - to allow room for saving is absolutely essential when it comes to having enough for your eventual retirement. Budgeting, planning for emergencies and dealing wisely with debt – they’re not skills that Shaun was raised with, but she's on board to do what she has to do to close her retirement gap. Shaun is 42, she works as a junior art director and she lives in New York. Welcome Shaun. We're happy to have you.

Shaun: Thank you.

Jean: So tell us a little bit about you. You've got a very interesting life packed into your 42 years.

Shaun: I came to New York when I was 19 to study theater and acting, and prior to that I lived in a small town in the Midwest. I was raised by a single mom. I think the best piece of advice my mom gave me is if you owe someone money, never make them come to find you to get it. If you can't pay when you said you were going to pay, then make sure you contact them first.

Jean: You know, that's wonderful advice, whether you're talking about a person or a company, because even if you've got student loan debt that you're struggling to pay or a mortgage or a credit card bill, if you call the company and you give them a heads up about what's going on in your life, they are going to be much more willing to work with you.

Shaun: Exactly. I'm very well acquainted with this struggle. Recently I had fibroid tumors, so I was laid out for about six weeks. There were a lot of medical bills to pay. My insurance didn't cover everything.

Jean: Oh my goodness.

Shaun: And then there was a lot of follow-up, and things like that and then about a year later I was laid off, and I got sick again and ended up in and out of the emergency room, and I was unemployed and couldn't really look for work between all the doctor visits, and so I drained my savings. I emptied out my IRA. All of my safety net was burned up in this time.

Jean: So you're starting over.

Shaun: I am starting over from zero. At 42.

Jean: I know that this is tough, but a fresh start can be a good thing. So tell us about your financial life right now. I know it's on the upswing. You've got a job.

Shaun: I've got a job, I got a new job, which is almost double the salary that I was making before. I'm working on trying to pay off some of the debt that I've incurred over the past few years – medical bills, student loans, you know that had to take a back seat for a while.

Jean: Lay out the numbers for me.  What's your salary right now?

Shaun: My salary before taxes is $80,000 a year.

Jean: What does it look like in debt?

Shaun: About $40,000 in debt. That's including student loans, medical bills, taxes and credit cards and everything else.

Jean: Savings?

Shaun: No savings. I actually still have an IRA. I haven't been putting anything into it and I did have to take the money out, but it's still a live account so I could start putting money into it at some point, which I do hope to do in the next few weeks, or when I talk to the financial planner.

Jean: What other sorts of expenses are on your agenda?

Shaun: I think outside of the main ones, being rent and utilities and things like that, I think these are the main ones. I would love to see myself debt-free in the next 10 years. If I can whittle that number down and be debt-free sooner, that would be great. But I'm just looking to get myself out of the hole.

Jean: So debt-free and rebuilding savings.

Shaun: Yes.

Jean: Is your new job going to provide health insurance?

Shaun: This is a brand new job and I'm ending the probation period I guess you would say,  At the end of this week, that ball should be rolling.

Jean: All right. That's a big worry, especially with your health issues. We don't want you to not have health insurance. So when you sit down with the financial advisor, aside from dealing with a plan to pay off that debt, what else are you looking for?

Shaun: You know, I've been thinking a lot about how I handle money over the past few weeks, because I knew I was going to talk to you. And I realized that how I spend money is deeply connected to my own sense of self-care and not necessarily in a good way. I think because I spent so many periods with my mom when I was younger, where we really were in dire straits financially, when I am low on money, that panic, I start to get this panic like I'm not going to be taken care of. Then I want to spend more money, so I am trying to find some parameters so that I can exist on low amounts of money and not panic about it. Because I'm assuming that if I'm paying off debt and putting money into retirement, I'm not going to have a lot of "fun" money and not having that does create a little bit of a panic. Does that make sense?

Jean: It makes complete and total sense. I think far too few people are as tuned into the fact that their money story, their upbringing and the way that money was treated when they were children, deeply impacts their finances to this day. And the financial advisors, the ones that we've chosen, they are very well used to operating not just as managers of dollars and cents and investments, but they often function as therapists. So we will make sure you get a helping hand there, too. But I got to say, I give you a lot of credit for being that tuned in with who you are and why you act the way that you do, because a lot of people just put their heads in the sand.

Shaun: Well, thank you.

Jean: Alright, fantastic. Well Shaun, thank you so much for sharing your story and we will get this process rolling.

Jean: My team and I were very excited to be able to pair Shaun with certified financial planner, Kimberly Foss, who is the founder of Empyrion Wealth Management and author of Wealthy By Design: A Five-Step Plan For Financial Security. She founded her company in 1989 and lives in Sacramento, California. Hi Kimberly.

Kimberly: Hi Jean. How are you doing today?

Jean: Doing just fine. So tell us about the math before we dive into the story. What sort of retirement gap was Shaun looking at, and what will it be if she goes through with the plan that you designed for her?

Kimberly: The math is that she really needed $1.9 million, and she basically had zero saved.

Jean: Wow.

Kimberly: When I did give her the number, she was a little bit shocked. There was some silence. And then I said BUT, if we run the plan the way that I have mapped it out for you, you will be able to retire and you'll actually have some money left over.

Jean: That sounds like a lot of money, but you're going to break down for us how it really just equates to about $5,000 a month or $60,000 a year.

Kimberly: Sure. So she's going to take the recommended payment amount for her credit cards, and pay the credit cards off. So in 2019 we're going to get rid of about $25,255. The only thing that she'll have leftover will be about $38,000 student loans, and the monthly payments on that will total about $2,284 a month.

Jean: That's significant. But she's ready to do it.

Kimberly: She is. She is. She's absolutely committed. She's going to then contribute to an emergency fund, from 2021, of $100 a month. She's going to then maximize also a Roth IRA on a monthly basis every year, and then she'll also contribute to a non-qualified tax-deferred, no-load variable annuity every month. That will give her the dollar amount so that she can retire at age 65 and then be able to then annuitize that annuity, give her a monthly income of $1,300 a month there. Her social security would be $3,400 a month, so she'll roughly get about $5,000 a month for the rest of her life and retire at age 65.

Jean: I love the idea that you're buying her a retirement paycheck, essentially. That's something that a lot of people should be looking at because one of the big fears is that we're not going to be able to make our money last, even if we amass a great deal of it. How did you solve that problem for Shaun?

Kimberly: I first came up with the retirement expenses that I felt that she was going to need, right? So we were able to solve for that. I backed into that, and I thought that this is one of the things that a lot of folks don't understand about investing, and they do have that fear. So what could be something that could sort of offset that risk? That would be an annuity, because what you're doing is you're shifting that risk of a guaranteed income to an insurance company.

Jean: How was she feeling when you finished this process with her?

Kimberly: She was completely relieved. Like she couldn't even believe it.

Jean: That she had the ability to not only get out of debt so quickly, but also save for her future? Well it's life-changing what you did for her, so thank you.

Kimberly: She's a really neat lady. I think she's going to do very well and she'll do this. I know she will.

Jean: Well thank you so, so much.

Jean: It has been a few weeks since Shaun and Kimberly started working together and we wanted to check back in with Shaun and see how she's doing with her new financial plan. So Shaun, bring us up to date. How much have you learned, and how do you feel since we last spoke?

Shaun: I realized just how I little a grasp I had on my finances. Like, she asked me for specific numbers and I'd send them, and she says, "No, no, I need the interest rates, too." And I'm like, "God. I don't even know what those are." In terms of trying to do my own budget in the past, or trying to get out of debt in the past, I never even put that kind of thing into account. So that was a little bit of a learning experience. And when I gave her the numbers and she came back with a plan, it's 38 pages long. This woman is no joke!

Jean: No, none of our planners are a joke.

Shaun: Oh my gosh! And I was so overwhelmed by it. I just had to close it and not look at it for a day. When I gathered my courage and looked at it the following day, I was like, "Oh, this makes sense. This is an aggressive plan to get out of debt in a year." I just never would have thought of this on my own or been able to come up with this on my own.

Jean: I mean, the idea of being out of debt in a year is a big goal, but it's such a great one. Do you feel like you'll be able to stick with it?

Shaun: I'm 100 percent willing to try. I should clarify, the student loan is going to take quite a few years to pay off, but the credit card debt, those should be gone in a year.

Jean: I hear what you're saying. And by the way, that idea of paying off student loans over time, that's perfectly valid and reasonable and exactly what I would recommend. Usually the interest rates on student loans are more reasonable than they are on high interest rate credit cards, and so that's why we prioritize getting rid of those credit cards first. Now that you've seen the plan, what does your day-to-day spending and budgeting look like?

Shaun: So I downloaded Mint and linked up all my bank accounts, because I really don't know what I spend in a month in terms of food and clothing and transportation and things like that. The first thing it showed me was that I spent $250 on food.

Jean: Was that surprising?

Shaun: Oh my God! I had no idea. You know, I'll grab something here or grab something there if I'm rushing, or I'll buy lunch at work, and I just don't pay attention to it at all. So linking that up to my accounts was really eye-opening and helpful.

Jean: When we talk about it being eye-opening, sometimes we have the ability to save money, to spend less money, but we just don't realize it. When we talked, you got open and honest with us about your emotional spending. After you saw the plan, you made an appointment with your psychiatrist. Why?

Shaun: Because I don't want to mess it up. And if there's some anxiety issues that caused me to do that type of thing, like if there was a deep-seated fear that I'm not going to be taken care of or I'm gonna worry that I don't have enough, and I don't want to do that again. Especially since I'm getting this help, which is pretty tremendous. So if I talk to this therapist, she might prescribe something or she might give me a different way to look at anxiety, or something. Just I'm just trying to get as much resources as possible.

Jean: You know what, I give you so much credit for doing that, because you're right. Change is hard, and understanding yourself to such a degree that you know what is likely to stand in your way, and taking steps proactively to deal with them, that's amazing. So as you look at this plan and as you look out in your life long-term, what do you hope this allows you to accomplish?

Shaun: Well, it'll be a bit of a clean slate. For the past few years, I've had a lot of creditors calling me, and so in very simple terms, I look forward to being able to breathe easy and to answer my phone whenever it rings. And that may sound like such a small thing.

Jean: No, it's not a small thing and I think what comes after that, once the debt is gone, knowing that you're putting some money away for not just emergencies but for the future, that's something that you'll want to hold onto as well.

Shaun: Yeah. Knowing that I'm taking care of myself in a way that's healthy and can also allow me to help others, I look forward to that as well.

Jean: Well, thank you so much for going on this journey with us and for sharing your story. We really appreciate it.

Shaun: Thank you, too. I really appreciate this. You have no idea.

Jean: Many of you listening out there may be taking notes, but I just want to very quickly recap the steps that Shaun is taking to close her gap. She's getting on a monthly budget as we heard with the help of budgeting apps and software. She's going to pay off her credit card debt by the end of 2019. She's working to build an emergency fund so that she can weather the next storm when it comes, and she's going to ramp up her retirement savings by trying to put some money in an IRA which she'll eventually use to purchase an annuity that will provide a paycheck in retirement. All good steps. We are so grateful to Shaun and Kimberly for sharing their thoughts and their experiences and their wisdom with us today, and we are thankful to all of you too for joining us on this episode of Closing the Savings Gap. Our goal with this entire series is to help you think about the challenges that lie ahead in retirement way before the time that you actually get there, so that you can close your own retirement gap and choose your own path. And for those of you who have enjoyed this program, I'd love to suggest that you check out my weekly podcast, HerMoney with Jean Chatzky.  It is our continuing conversation on money and life — and life and money — for women of all ages. For now, please tune in to the next episode of Closing the Savings Gap, and join us at AARP.org/closingthegap to find episodes, stories, and more great content. Hope to see you there and we’ll talk soon.

Disclaimer: The information contained in this podcast is provided for educational information purposes only, and does not constitute a recommendation from any guest of the podcast to the listener. Neither any guests nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct, indirect, or consequential loss or damage is expressly disclaimed. The guests of this podcast are not providing any financial economic, legal, accounting, or tax advice planning or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by such guests or their affiliates to that listener, nor to constitute such person a client of any guests or their affiliates.