Financial Planning for Single Women, Case Study “Sarah” - Saving for Retirement and Kids College
Financial Planning for Single Women, Case Study “Sarah” - Saving for Retirement and Kids College
Introduction
In a world where financial planning often seems like a daunting task, especially for single women juggling responsibilities like saving for retirement and their children's college education, Sarah's story stands as a beacon of hope and empowerment. Sarah, a single mother determined to secure her financial future, embarked on a journey of meticulous planning and strategic decision-making. Through her experiences, we delve into the realm of financial planning for single women, navigating the intricacies of saving for retirement while simultaneously preparing for the educational needs of her children.
Sarah's narrative not only sheds light on the challenges faced by single women in financial planning but also serves as an inspiring testament to resilience, determination, and smart financial management. As we unravel her story, we uncover invaluable insights and strategies applicable to women from all walks of life who aspire to achieve financial independence and security.
Join us as we embark on an enlightening exploration of Sarah's financial journey, examining her decisions, triumphs, and lessons learned along the way. Through her experiences, we aim to empower and equip single women with the knowledge and tools necessary to navigate the complex terrain of financial planning, ensuring a brighter and more secure future for themselves and their loved ones.
Case Study: Sarah
Age: 40
Family: 3 children age 5,8,10
Lives: High Cost of Living Area (Boston, New York, California)
Annual Income: $300,000
Mortgage: $700,000 - 30 year fixed @5%
Savings / Investments: $50,000
Retirement: $15,000 in 401k
Sarah's situation:
Sarah is a successful professional earning $300,000 annually. She's a single mom with three children, and she wants to ensure financial security for her retirement as well as save for her children's college education.
She is not starting with much but her income is set to be stable in a career she expects to stay in until retirement at age 65.
Sarah's Financial Goals
Save for her retirement at age 65
Provide funding for her 3 kids to attend college
Budgeting and Lifestyle
Sarah needs to evaluate her current expenses and prioritize saving for both retirement and college over non-essential spending. Sarah also needs to establish a larger emergency fund to handle unexpected expenses without dipping into retirement or college savings.
Monthly budget
Here is the monthly budget for Sarah and her expenses. Her fixed living expenses per month of $11,200 are 62% of her income net of federal and state taxes at $18,000.
Keep in mind that tax calculations can be complex and may vary based on individual circumstances, so it's important for Sarah to consult with a tax professional to get the most accurate figures for her situation.
Sarah has $6,800 a month to put towards her top 2 financial goals:
Save for her retirement at age 65
Provide funding for her 3 kids to attend college
How might she achieve success for her financial plan as a single woman with 3 kids?
Retirement Savings:
As a single woman, Sarah is responsible for her retirement first and foremost. Sarah should maximize her 401(k) contributions up to the maximum amount, which is currently $23,000 for individuals under 50 for the 2024 tax year.
In addition, Sarah can also contribute up to $7,000 to an IRA or Roth IRA, if she is eligible, to further boost her retirement savings.
This would total $30,000 a year or $2,500 a month.
College Savings:
Sarah can open 529 college savings accounts for each of her children. Earnings in 529 plans grow tax-free, and withdrawals are tax-free when used for qualified education expenses.
Sarah will need to determine how much she wants to save for each child's college education and adjust her contributions accordingly.
Average college costs
Average college costs including tuition, books, supplies, and room and board based on Empower Personal Capital analysis is as follows for the state of California. College costs increase every year at a rate higher than historical inflation.
CA Public In-State Institution $22,965
Avg. Out-of-State Public Institution $38,137
Avg. Private Institution $44,865
Sarah decides to save $1,000 per month for each child, at a total of $3,000 per month or $36,000 per year.
Investments & Emergency Funds:
The remainder of Sarah's cashflow after the retirement and college savings is $1,300 and will be used to create a larger emergency savings cushion as well as a diversified investment strategy that balances risk and return
What is the projected portfolio of Sarah’s financial planning for the future?
We will use Empower Retirement Planner functionality and we'll need to make certain assumptions about her current financial situation, retirement goals, risk tolerance, and investment preferences.
Assumptions:
Current age: 40
Retirement age goal: 65
Current retirement savings: $65,000
Annual contribution to retirement / savings: $45,600
Expected annual return on investments: 6%
Social Security benefits estimated at retirement: $3,796 per month
College Savings for children are at $1,000 per month for each of her 3 children
Sarah's risk tolerance: Moderate
Expected Expenses in Retirement: $6,000 per month
Using Empower Retirement Planner, Sarah can input these details to generate a personalized financial plan tailored to her specific circumstances and goals. The planner will provide insights into projected retirement income, college savings projections, and recommendations for optimizing her investment strategy to achieve long-term financial security. Regular monitoring and adjustments will be essential to adapt to changing circumstances and market conditions, ensuring Sarah remains on track to meet her financial objectives.
Remember, this is a hypothetical scenario and the actual approach would depend on Sarah's specific circumstances, risk tolerance, and future financial goals. It's important to consult with a financial advisor to create a personalized plan tailored to her needs.
The planner estimates there is an 84% chance for her portfolio to deliver against her goals and last through age 92.
Let’s check out the details:
Savings: Sarah will continue to make a savings rate that includes retirement, emergency cash, and investments for $3,800 per month / $45,600 a year until she retires at age 65 in 25 years.
College Savings: Sarah will make contributions of $1,000 per month per child for a total of $3,000 per month / $36,000 towards the children’s education. As each child enters college, the savings rate will drop until she will stop funding altogether.
Sarah decided she wants to set a goal to fund $30,000 a year for a 4 year college degree for a total of $120,000 per child.
This estimated cost includes tuition and fees, room and board, books and supplies, personal expenses, and transportation. It's important to note that these costs can change annually and can differ between different colleges within the state.
For the most accurate and up-to-date cost information, it's recommended to refer to the specific college's official website or contact their financial aid office.
The oldest child at age 10 has the least amount of time for the investments to make the target amount and shows a shortfall of college funds saving only $104,500 towards the target of $120,000.
The second child at age 8 has more time in the market for the investments and savings to grow and compound, and shows a projected surplus in the college funds for $149,100 to the goal of $120,000.
The youngest child at age 5 has the longest time in the market and savings to be added and grow so also shows a surplus with $164,600 total to the target of $120,000.
Sarah could choose to supplement the oldest child from her savings accounts to fund the deficit and decrease future contributions for the younger two children. She could also remove the surplus from the funds in the accounts, but that can create tax penalties due to the growth being tax free.
Retirement: At age 65 when Sarah will retire her portfolio is estimated to be at $1,151,864 as the median (the middle number of all the possibilities) and with a conservative approach for a low return environment to be at $805,965.
Social Security: The amount of Social Security benefits are calculated based on a variety of factors, primarily focusing on your earnings history and your age when you start receiving benefits. The estimate for Sarah is $45,552 per year of social security.
Sarah estimates she will live on $72,000 a year as her mortgage will be paid off and the retirement and college savings will be complete, so her expected expenses are much lower.
The portfolio is expected to be able to meet this goal at 84% chance.
Conclusion
In conclusion, Sarah's journey serves as a poignant illustration of the challenges and triumphs that single women face in the realm of financial planning. Through meticulous planning, prudent decision-making, and unwavering determination, Sarah has navigated the complexities of securing her retirement while simultaneously saving for her children's college education.
Her story underscores the importance of proactive financial management, regardless of one's circumstances. By prioritizing her long-term goals, maintaining a balanced approach to investing, and leveraging resources effectively, Sarah has positioned herself and her family for a brighter and more secure future.
However, Sarah's journey is not just about financial success—it's about empowerment. It's about single women like Sarah taking control of their financial destinies, breaking barriers, and forging their paths toward independence and security.
As we celebrate Sarah's achievements, we are reminded of the invaluable lessons embedded within her story. Whether you're a single woman, a parent, or someone simply striving for financial security, Sarah's journey offers inspiration and guidance for all. By embracing proactive planning, prudent decision-making, and a steadfast commitment to your goals, you too can embark on a path toward financial freedom and empowerment.
As we bid farewell to Sarah's narrative, let us carry forward the lessons learned and the spirit of empowerment that defines her journey. Together, let us embrace the opportunities that lie ahead and chart our courses toward a future defined by financial independence, security, and success.