13 Jan Lesson Learned: How to Lose Over 100k in One Year
My client was a 62-year-old male who worked for one of the major factories in the city. This company was offering buyouts for all of their hourly employees. Most of these employees had worked for the company for 20-30 years, so everyone was very excited about this opportunity.
Buyouts are a common method for reducing the number and cost of employees. Typically, the employer offers some or all employees the opportunity to receive a large severance package in return for leaving their employment.
The Problem
The average buyout in this company was approximately $100,000. When I met this client, he had credit card and mortgage debt. Because of his age, he was eligible to receive his pension and social security. Unfortunately, since he was in debt, he had to keep working to pay all his bills.
The Solution
I contacted a banker friend to see if there was anything he could do to help. To our surprise, my client had equity in his home, so we took out a line of credit to pay off his mortgage and his credit cards. After discussing these options with the client, we refinanced his first mortgage and credit cards at 4.5%. (This was a great move because his credit cards had an interest rate of 12%, and his mortgage was approximately 5%.)
This resulted in his saving approximately $400 a month in interest, and his debt payments decreased more than $500 a month. We were all thrilled with his new financial picture, but we weren’t done yet.
Next, we rolled over his 401(k) into an IRA. He started taking his pension and receiving social security, and he planned to get a part-time job the following year after the holidays to supplement his income. He was looking forward to traveling and enjoying his retirement too.
When he received the buyout from his pension, they allowed him to roll the buyout into a qualified account and defer the taxes on the funds. Then we rolled the $100,000 from the buyout and 40(k) (his old 401(k) plan) into an IRA.
He received the funds in the fall of 2003. He was set! We took care of his debt, and now all he needed to do was enjoy the rest of his life. He was receiving $1500 a month from his pension and $1700 a month from social security for a total of $3200 a month. Plus, we lowered his outgoing expense for a single person.
The Result
Now, here’s where the story changes for the worse. In December of 2003, he called me because wanted to withdraw $10,000 for a retirement trip; he promised that this would be the only time he called for money. (I wish that were true.) In 2004, he called in February, March, April, May, July, August, September, and November.
In December 2004, we sat down to review his account. I informed him that we only withheld 10% for federal taxes and 5% for the state, so he only had $25,000 left. He would have to use these funds to pay for the taxes, leaving him with basically nothing left in the account.
The following year he stopped by my office and apologized and started to cry. He stated that not only did he run out of money but he also ran his credit cards back up. He ended up in a really bad place financially because of his poor decisions and lack of foresight. Learn from his mistakes, and don’t let this happen to you!
