How to split my net income – will my cousin be okay?
I recently received an email from a reader who was searching for some advice regarding the net income of a relative. The question raised some themes which would apply to many readers. Therefore, rather than answer the question directly to the reader, I thought I would share my answer with you all. The question is in blue italic; my responses are in plain…
Hi moneystepper,
Hi dear reader. It is lovely to hear from you. Thanks for getting in touch.
I like your website.
Awesome. I’ve very pleased that you enjoy it.
I hope you can help me.
Me too. I enjoy engaging with my audience and I love receiving reader questions.
I am trying to help my 65 year old cousin whose husband is terminally ill. She is worried about her financial future but I think she will be ok. Can you please give me your take?
I’m terribly sorry to hear that your cousin and husband are going through this difficult time. The stress of financial concerns will not make this process any easier, so hopefully we can relieve some of your cousin’s fears.
Can you please tell me how much of a person’s net monthly income should go to pay for property taxes, insurances, utilities, gasoline, dental, medical, food, clothes, cable tv, water & utilities & misc? Basically, the person’s total living expenses? Half? I think right now and for several years they have spent half their net monthly income on living expenses. They would save up for trips & vacations.
This varies hugely for every person. Each category provided (and many others) should be included in a written budget and carefully monitored to ensure that the total expenses are manageable based on the income.
Some specific rules of thumb include:
- Aim for a “savings rate” (a percentage of your net monthly income which is put instantly into investments) of over 10%. The higher this figure, the better. A lot of the Personal Finance blogging community aim for rates of up to 50% on average incomes by living sensibly. It seems that your cousin and husband are already achieving this rate which is great.
- The cost of housing should be no more than 25% of your net monthly income. This will include mortgage costs & property taxes.
- Spending on “required” expenses (utilities, gasoline, food, water) should be minimized where possible by cutting out waste, minimizing usage where possible and finding the best value provider for your situation. This can be done by comparing providers and looking for cashback offers when switching supplier). In this category, you should also include medical insurance premiums, which will cover the majority dental & medical expenses.
- Spending on discretionary items (entertainment, clothes, etc) will be dependent on the individual and their income. The higher their net wealth and income, the more (as a gross figure) they can spend on these items. However, this should always be carefully budgeted to ensure spending on these items does not get out of control. I would recommend spending of no more than 5-10% of your net income on this category.
If your cousin and husband have been able to only spend half their net income on living expenses, then they are in a great position. In my current goals at moneystepper, I aim for 60% (Goal #3), but this is extremely frugal. 50% is absolutely fine (in fact, it is probably better than 95% of the US population).
She will have income from 2 retirement pensions – she will still get her husband’s as he chose to have a survivor benefit when he retired and she will also have her state teacher’s retirement pension.
This will really help. Survivor’s benefit pensions are becoming less common, so from a financial perspective, it is good that your cousin and husband have this set up. A survivor benefit pension is essentially a benefit option that will let you continue to receive monthly benefits for the rest of your life from your spouse’s pension if your spouse should die before you.
It is unlikely that your cousin will receive the same level of pension once her husband is no longer alive, but she should still receive a good proportion. She should ask the pension plan administrator to determine how much she would get under the current agreement.
The most standard example of a survivor benefit pension is:
- If you and your spouse choose to receive his pension as a lifetime benefit, while your spouse is alive, you and your spouse might receive $1,600 a month in pension benefits. It would stop when he dies.
- However, under a joint and survivor annuity, the benefit might be $1,300 a month while your spouse is alive (a little less). When he dies, your benefit would be $650 a month for as long as you live.
If we add the contribution of the survivor pension to your cousin’s state teachers retirement pension, then the pension income that your cousin will receive should be sufficient to cover reasonable living expenses, especially considering that…
This person has no debt and is mortgage free.
This will make things much easier.
They paid off their mortgage 8 years ago.
Even better.
And she has an investment portfolio worth just under $600K and an “emergency fund” of about $30,000 and 2 new paid for vehicles.
Financially speaking, your cousin and husband will be fine. Just based on the $600k alone, annual returns of only 4% above inflation (returns from retail estate and the stock market historically outperform this figure) would provide her with $24,000 annual income. Because this is above inflation, it ensures if she spends all this income annually, her future income from her investment portfolio will continue to increase in line with inflation forever. Hopefully, her “investment portfolio” is tax protected (IRA, 401k, etc). If not, her actual returns will be slightly less following taxes.
$24k is equal to $2k per month which, without any mortgage or other debt payments to make, should be a reasonable amount to live on. Also, remember that this is in addition to the aforementioned retirement pensions, so her actual “income” each year will be significantly higher than this.
Thanks for any opinion you might care to share with me.
Years of living within their means has put your cousin and her husband in a financially strong position. Because of this, their financial future isn’t something that they need to stress about too much in the coming months. Instead, they can concentrate completely on enjoying the time they have left together.
I would also recommend that they seek professional face-to-face advice from a financial planner regarding the details of estate planning, their $600k investment and the other issues raised in these questions.
I hope that advice helps and I wish you, your cousin and her husband all the best.
Do you have any additional advice for this reader?
Ray @ Squirrelers says
Sounds like a sensible plan. One question I have is: where they are located, is there any substantial pension obligation risk? There has been a major city here in the US that declared bankruptcy and the viability of expected pension payments has been a big question for many.