Should I take early retirement? Can a teen have a Roth IRA? How should I spend abroad?

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Rent-to-own apartments and homes
2. Retire now or later?
3. Roth IRA for teenager
4. Managing money while traveling abroad
5. Life insurance misinformation
6. Moving forward in bad economy
7. Pay off line of credit?
8. Motivation to live, not exist
9. Painful breakup advice
10. Quitting alcohol addiction

Don’t look at Monday as a bad thing. Look at it as a good thing. If you go out and hit a home run today while everyone else has a big case of “the Mondays,” you’ll really stand out.

What is the deal with “rent to own” apartments/houses? My husband and I have been weighing the rent vs. own situation for several months. How does rent to own fit in and what are the pros and cons?
- Rachael

Rent-to-own apartments and homes are similar to car leases. It’s basically a contract between a renter and a seller that the renter will have an option to buy the property at the end of the rental agreement.

Most of the time, the agreement specifies a buying price for the property up front, as well as applies some portion of the rent towards reducing that price. When the agreement ends, the renter has the option to buy the home at the adjusted price or walk away, leaving the owner with what amounts to a unoccupied rental.

The exact specifics depend heavily on the actual rent-to-own contract between the renter/buyer and the seller. They can vary quite a bit, but that’s the general idea behind them.

I am an employee of the federal government. I’m 56 years old and have 32 years of service. I’m in the CSRS (Civil Service Retirement System). I am eligible for retirement based on my age (55 or higher) and years of service (30 or more). My organization recently offered an incentive program to retire ($25K). I acknowledged my interest in the incentive program. Now, they’ve made the actual offer. I have about two weeks to accept or turn it down.

I make around $115K a year. In retirement, my annuity will be around $60K per year (pre-tax)…that’s about 60% of my high three years…which is a little less than the $115K. I could stay and continue to earn 2% more annuity for each year I stay. Or, I could accept the incentive and go to work for one of our contractors for about what I make today. That would help me to get to that debt free status in about 3 years.

Ashamedly, I have about $60K in credit card debt, $35K in home equity debt, and about $70K in mortgage debt. Yes, it’s ugly!

I’d really like to retire around 60 – 62 years of age…and debt free. It’s clearly a long, tough road to debt free if I stay. But I feel like I’d have a nicer annuity when I do retire. Or, if I leave and can earn what I make today, I could focus a lot of money towards retiring all my debt.

The question I have is (1) do I stay and work harder/longer on becoming debt free and increasing my lifelong retirement income or (2) take the incentive, increase the amount of money to eliminate all my debt? Additionally, I’d like advice on the best way to utilize the incentive money. After Uncle Sam takes his cut, I’ll probably end up with around $15K – $17K. I could take the incentive in increments or as one lump sum. My initial thought is to put it in my savings/emergency fund and pay significant extra amounts on my debt(s) each month while earning a little interest on it. My second thought is to pay off one of the 3 credit cards that are in the $18K – $20K range and use that approx $600 per month to work down the other cards/debt.
- Rick

What this really boils down to, in my eyes, is whether or not you enjoy your work and whether you have a game plan for what to do after retirement.

If you are a person who really enjoys their work, gets great value out of work camaraderie, and has only vague ideas about what to do in their next act in life, keep on working and build up a better retirement for you. You don’t have to walk away.

On the other hand, if you’ve got big plans for the things you want to do after you retire and you view your work as complete drudgery, take the path to earlier debt freedom and earlier retirement.

This is a case where, in my eyes, personal finance is really about the “personal.”

My son has earned a few hundred dollars this summer and I have encouraged him to put this money in a Roth IRA because 1) he has savings for his “wants” and 2) because we often talk about the importance of investing for retirement. Is it possible for a 17 year old to open a Roth?
- Lisa

He sure can, as long as he is reporting income on his 1040 that is equal to or greater than the amount being deposited in the Roth IRA (and he’s paying taxes on that income, of course).

In fact, that’s probably a pretty solid move, provided that you’re confident that your son won’t take advantage of the ability to withdraw Roth IRA contributions at will.

I would do the entire process as a collaboration, in which you research what a Roth is, what investment house you want to use, what investments to choose, and so on. Talk about the pros and cons of each. Empower him to make the choice himself, though.

At the end of this month, my wife and I are taking our honeymoon in Rome! Both of us love travel, and Rome has been near the top of my list of places in the world to visit for a long time. We’ve booked a flight and hotel already through Travelocity and that’s 100% paid for. We’ve budgeted $2-$3k for incidental spending while traveling (food, tours, souvenirs, anything that catches our eye and we want to experience). This money is also already set aside too, so we’re not going into any debt for this trip.

However, I’ve never traveled in Europe and had to manage a large chunk of spending money (previous trips were with family, and they handed the cash). I’m not familiar with ATM availability (or fees), or whether Rome is a cash or credit city (and if credit, which cards). I know I’m going to be paying fees either on cash exchange, or on any credit cards I use. What is the best way to handle spending money when traveling abroad? I want to make that pool of cash go as far as it possibly can and could use some help.
- Mkie

The first step I’d take is contacting my bank to find out about overseas ATM availability. What are the fees for using an ATM in Rome? It varies a lot from bank to bank, so call to find out their policies.

I would do the same thing with your credit cards, though Visa and MasterCard are pretty widely accepted throughout Europe.

Ask about the currency conversion for each card. Find out which one does the best currency conversion (after fees) for you. So, for example, say “I’m going to spend/withdraw 100 euros in Rome tomorrow. What will be the total cost for me, including fees, in dollars?” Whichever card/cards offers the best rates should be the ones you use.

I’m very, very concerned about the many queries you seem to get about whole life insurance and, most especially, insurance on the lives of children. In my view, this sort of product is a scam and it’s sold to ignorant people who can least afford it. (I use the term “ignorant” in it’s neutral sense, meaning people who simply are uneducated about the product and don’t know anything excepting what the salesman is telling them.)
- Dorothy

This is a problem with a lot of personal finance (and other) decisions.

The reason you find so much conflicting information about things like life insurance for children is because you have people with different motivations saying different things. If a person’s primary incentive is to sell a product, they’ll give you advice that results in you buying that product, even if it’s not necessarily from them.

Your best best with any financial question, particularly when it comes to insurance, is to seek out sources of information that don’t have a vested interest in selling you on insurance. Read an assortment of personal finance books and Google the authors to find out if they’re insurance salesmen. Figure out which people have a vested interest in helping you versus a vested interest in selling product, and trust the people who want to help you.

My mom is only charging me $350 a month for rent and all totaled my fixed bills are $505 which include internet (I have online courses so it’s a need right now), cell phone (we don’t have a landline), and storage rental. I also have a payment agreement I will be paying to my old apartment but I don’t know the amount as of yet. I am very worried about what will happen after I graduate. I want to have a job lined up and ready to go, but I’m worried with the economic troubles we are facing. My friend graduated 2 years ago and has yet to land a professional job in the field. While I have a lot more going for me I still worry.It is almost assumed I will be relocating for a job as it’s just one of those things that comes with my field. As well it could take up to 2 months during the hiring process and the time you start, I could be hired in May and not actually start till August. So I’ve started saving up a good chunk of my stipend, to the tune of $800 from each check, by the end of the program if I kept that up I would have $8,000. But I don’t know if that’s too much and if I should be paying off debt and saving less. I don’t live outside my means, and usually research and save for any purchase over $50. But I do have a bad habit of lending money to family.
- Jai

The big thing you need to do is start your job search early. If you’re going to graduate next May, start searching now. If you are a good candidate, most employers will wait a month or two for you to begin work versus hiring a poor candidate.

Another concern is your propensity towards lending money to family members. Stop! You’re a college student, for goodness sakes! If anyone should be borrowing money, it should be you. Besides that, lending money to family members often ends with strained relationships and mistrust, something you don’t need in your life.

Aside from that, I think you’re doing well.

My questions is regarding how to categorize our Line of Credit loan. Our story: my husband and I both did the College/ credit card/ unwise use of money thing in our 20′s & early 30′s. Over the past few years, we’ve been improving our financial “health” – paid off those credit cards, got way more in touch with our spending, spend less than we earn, do a good job with our budget, and carry no credit card debt. We have a mortgage of $350,000, and a home equity line of credit of $44,500. The LOC was opened several years ago (before we wised up) to re-fi part of our mortgage, and to give us some house project money. We did the projects (patio, yard & kitchen improvements), paid some credit card debt, bought a fancy dog… you get the picture – it wasn’t all responsible spending.

Now that we have no other debt, I waffle about how to approach/categorize our LOC. I want to lump it in with the mortgage, and call the debt pay-off/booty-busting part of our life done. But I’m wondering if that’d be “cheating”. The LOC has higher interest and part of that spending really was in the same vein as our credit card abuse. Should we consider it a credit card, and continue to bust booty to pay down the LOC? The thought makes me want to cry.
- LeAnn

I would consider it a credit card, particularly since it has higher interest than the mortgage. Focus on paying it off sooner rather than later.

Here’s the truth: people virtually never regret paying off a debt. The freedom from that monthly payment is a tremendous boost, even if it’s not mathematically the best solution. The increase in monthly cash flow also enables people to work more quickly towards their goals and withstand major setbacks more easily.

Go for getting rid of the debt, and don’t look back.

I was paid three days ago. After we paid the mortgage and car insurance, we only have $150 to our name until the 15th. With that, we have to buy gas and groceries for two weeks and pray that no emergencies come up in the meantime. For months we have been cutting back more and more and more. My husband of five months has been unemployed since December. We had savings and emergency fund but it was depleted a month after the wedding when we suffered a very serious legal issue that required us to hire an attorney. The retainer took every penny we had. When my husband is not looking for work, he spends his time learning how to make foods from scratch, like bread, bagels, pasta. He’s gotten good at stretching the food budget (what of it there is). We don’t go anywhere. We don’t do anything outside the home because we can’t afford to waste gas. There is no “fun money.” Today, he is calling the insurance company to reduce our coverage to as little as possible and I will be calling to cancel the cable. I make enough to cover the bills, but there’s not a lot left over for gas and groceries, let alone savings. At the end of the month our property taxes are due – $1700. I had the money saved for it, but all of that went to the legal retainer. It won’t get paid. We have is a credit card with a $1k balance, racked up over the summer to make ends meet, payments are manageable. We’ve placed ads to sell valuables, but there’s not much interest. I’m feeling so low right now. We are just existing. Not living. This is no way to live. It’s not a debt issue. It’s an income issue. Moving wouldn’t make sense. Our mortgage payment is lower than rent in this area and there’s a custody arrangement in place which must be considered. We have to ride this out, but man, this is painful.
- Tara

This almost exactly describes my situation in 2006: bills without enough money to pay them. For me, it was a financial bottom and it led to a real turnaround.

My sincere suggestion to you is to not give up hope. It’s hard, I know, but this trial is an opportunity to figure out what really matters to you and your husband. Cut away everything and see what you genuinely miss – you’ll be surprised how little of it actually matters in your day-to-day life. What you’re learning right now will stick with you and help you for the rest of your life.

As for your husband, he should get a job. Any job. I know there is work out there, but it’s often work that people don’t want to do. Check your pride, get a job, and start bringing in some income before you lose what you have left.

I just broke up with someone I’d been seeing for six years and engaged to for two years. I’ve made multiple career decisions and lots of financial decisions based on the idea that we would be together for the long haul. Right now, I’m sitting in a city I don’t want to live in and a job I don’t want. I have a signed lease and a lot of debt, too. I don’t know what to do.
- Kelly

Right now, stop looking backwards with regret and anger. Looking at the past does not help you with the future.

You need to assess where you’re at right now and where you’d like to be in a year. Obviously, you’d like to be living elsewhere. That will probably require a different job. You’ll also need to be out of your lease.

Start building a to-do list to take you to that place where you want to be. Polish up your resume. Start hunting for something else. Cut back on your spending – I’m going to speculate that if you have a lot of debt, you probably have a lot of excess spending going on. This doesn’t just mean less shopping, it means doing things like trimming back on your cell phone plan, consolidating your debts, and so on. Figure out where you want to be going and direct your life towards making that happen.

Over the last few months, I’ve been following your personal finance advice to a tee and it’s really helped me to see what I’m doing right financially and what I’m doing wrong.

The big shock to me though is how much I am spending each month on alcohol. In June, I spent $450 on alcoholic beverages. That’s a payment on a new Lexus!

I’ve finally come to terms with the fact that I am an alcoholic. The amount of money I’ve been spending is a wake-up call. The question is – what’s next? I think I have the willpower to stop cold turkey and my wife is being really supportive as she’s quitting too, though she didn’t drink nearly as much as me.
- Dan

First of all, a huge congratulations on turning a major corner in your life, personally and financially. That takes a lot of guts.

I would strongly encourage you to find some additional support as you work through your alcoholism recovery. Alcoholics Anonymous is worth at least a look.

One big thing I would encourage you to do is buy a simple wall calendar and start keeping track of your successful days for a while. At the end of each day you manage to stay alcohol free, put a big red X over that date on the calendar. As you move forward, keep doing that, and you’ll begin to admire that big long row of Xs on your calendar. You won’t want to break that chain.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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