Picking Up the Pieces After a Financial Mistake

I recently had a conversation with a friend nearing retirement about her financial status after the market crash. She presented some of her finance concerns, and I would like to share her story -- and some advice -- about getting back on track after flailing in the financial crisis.

Anna’s Story

Anna* has worked in retail her entire life. Anna started out brilliantly, putting 6% of her earnings into a 401(k) matched at 1.5% by her employer. She worked for this employer for 25 years and socked away a pretty hefty amount toward her retirement.

Then, at 45 years old, she cashed out of her 401(k) — taking a 20% hit, by the way — set up a $100,000 savings account and poured all of the remaining cash into her dream home. The housing market was good and looking up, so she felt secure purchasing a 6-bedroom home on a large acreage as an investment.

In the housing market crash, her lovely home retained its value, because she lived in the very steady-market Midwest. However, her hours at work dwindled, and she worked through her $100,000 savings account rather quickly. In a four-year time period, she'd burned through 2/3 of her savings to supplement her lowered income.

Alarm Bells

Therefore, when Anna started thinking about retirement (she is now 55), I heard major alarm bells. Alarm Bell #1: All of Anna’s money was tied up in a house. Alarm Bell #2: At the rate she was going, Anna only had a year or two worth of cash left to supplement her decreased wages at work. Alarm Bell #3: Selling her mega-house now would take a long time, even though she would eventually get asking price.

Ways to Get Back on the Retirement Wagon

A good next step for Anna at this point is to go back to full-time employment for a few years. If her employer can't raise her hours, she should find an additional job or a different job altogether.

Next, she should put as much money from her new job into a 401(k) as possible. Even though she doesn't have many years left to build a retirement savings, squirreling away some cash is better than having none. Plus, she has few expenses, so putting money toward savings shouldn’t be too difficult.

Speaking of few expenses, Anna should consider keeping a finance journal to record where all of her money goes. Without a mortgage, credit card or auto loan, she should not be spending an average of $30,000 per year, especially since all of her retirement funds are tied up in a house.

Finally, Anna should consider selling her mega-house -- but be wary against selling too cheaply. Houses in that price range take a long time to sell, so she needs to be patient to bring in the price that it is worth.

Through Anna, I learned that even the most intelligent planners can have financial mishaps. Anna's new goal is to set aside $750,000 for her retirement — the low end of the projected amount she will need for comfortable golden years.

Photo Source

*Not her real name -- protecting identity

Anonymous's picture

MoneyCone wrote:

Mon, 02/07/2011 - 21:32 Comment #: 1

Anna shouldn't even be thinking of retiring. What you've outlined are some good points. Selling the house she may not get the best price considering the market. But if she can atleast make up for what she put in the house, then yes. Maybe rent for a few years.

Saving every bit is the only way going forward. If she can get a second job, that'll soften this blow.

Anonymous's picture

retirebyforty wrote:

Tue, 02/08/2011 - 00:32 Comment #: 2

OMG! I don't think Anna can retire. Cashing out the 401k was a huge mistake. :(
Tell her to take a look at the blog - Early Retirement Extreme. She might have to make some extreme maneuvers if she wants to retire.

How is she going to save 750k? Is there a plan?

Anonymous's picture

Daddy Paul wrote:

Tue, 02/08/2011 - 00:57 Comment #: 3

This story makes me ill. I think everyone should read it. Thank you for the inspiration to keep bloging. Perhaps others will not fall into the same nasty trap.

Anonymous's picture

Jeff @ Sustainable Life Blog wrote:

Tue, 02/08/2011 - 14:37 Comment #: 4

Anna could consider having some family members move into her house, and she could charge them a small amount for rent. I also think that she should at least delay retiring for a bit - or maybe pick up a second job to bolster her income. I know that most of the retirement fund gains are made in the last 10 years - after you've been socking away a bit of money for 20 years, you've got a large balance built up and can really leverage the market.

Christa Palm's picture

Christa Palm wrote:

Thu, 02/10/2011 - 19:02 Comment #: 5

MoneyCone, I was amazed at Anna's story as well. I hope she can sell the house soon and get back on her feet so that she can retire at a decent age!

Retirebyforty, thanks for the blog tip -- I will have Anna check it out. I think I'll find it interesting, too, so I'll have to look at it as well. As for the $750K, Anna truly bought a mega-house -- it is worth $1M. So, if she could sell, she may net close to $750,000 in the sale. But, she will need to find a little, more-manageable house or a rental, so she will still need a full-time job for a while.

Daddy Paul, I was a little ill when she told me the story as well. I hope it can help others avoid her mistakes!

Jeff, what a great idea to rent out part of the house to family! She didn't want to rent to any strangers, but if she could get family in there, she may be more open to the rental option. I'll pass that info along :-)

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