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 GOING BROKE |
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No one
initially told her that the money she withdrew from the retirement account
would be both taxed and penalized for early withdrawal. Once she was aware
of it, however, it didn't stop her. After all, she had her image to keep
up. Within six years, the retirement account was depleted. On top of that,
her alimony payments of $60,000 came to a screeching halt. Her only asset
was her $850,000 house, which certainly was not a measly amount of money!
But, with Sally's track record, whatever equity she had accumulated would
be gone within a few years at her spending pace. She had no paying job, no
income from alimony, and no retirement fund. Just the house. She cried to
her friend Jean, "If I had only known how fast my money would disappear, I
would have spent more carefully or gotten a job or something!"
And
how did Jean fare during this same time? Stan paid her half his salary,
$19,000, for five years, and half his retirement account. She earned
another $7,500 per year from a part-time job. With her sewing skills and
ability to get along well with few resources, she was able to add $5,000
per year to her mutual fund and retirement accounts that totaled $22,000
when her divorce was final. In the same six years while Sally was going
broke on $60,000 per year, Jean's mutual funds and retirement accounts had
grown to $81,135.
What should Sally have done?
Choice is an important word for most people today. Sally had
plenty of them. She chose not to work for pay. With her country club
connections, she could have tapped into a well-paying job from someone who
knew of her organizational and fund-raising skills. Or, if her pride
wouldn't let her ask her friends for job leads, she certainly could have
gotten some training and some coaching from a career counselor to secure a
position.
She chose to keep the $850,000 home, which was free and clear of a
mortgage. She felt she had an image to keep up and couldn't make do with a
more modest house. She chose to sit on an asset that did not produce any
income for her. If she had decided to buy a smaller home at half the cost
of her current home and invest the difference, she could have realized an
extra $40,000 per year in interest income at 8%.
She chose not to reduce her expenses. Large homes cost money. Hers
required the use of caretakers, which included a maid, housekeeper, and
gardener.
She chose to continue to buy clothes at the rate of $1,000 per month.
It didn't matter that she had four closets full already. But she didn't
want to be seen in the same thing over and over.
She chose to continue to have lavish parties and entertain on a large
scale. Her image was more important today than how she would look
tomorrow. "What will people think if I don't stay visible in the
community?" she asked.
She chose to continue to travel for relaxation and leisure. "I have to
get away once in a while to recuperate," she said.
She chose to have her hair, nails, and facials
done weekly. "After all," she said, "I must look my best."
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