For Rhonelle Runner, a wealth of knowledge can be a dangerous thing.
The 31-year-old Los Angeles music librarian is $60,000 in debt because she borrowed money to finance two master's degrees and, now, to pursue a doctorate in music history at USC. She expects to accumulate an additional $5,000 to $10,000 in debts before she's through.
Runner is convinced that getting more education will make it easier for her to find a job as a music historian, a field in which advanced degrees are becoming the norm.
"The want ads used to say 'second master's degree preferred,' " she said. "Now a lot of them say that it's required. It's just a matter of time before they require a PhD."
But the debt and her need to delay getting a full-time job until she completes her education will make it a challenge for Runner to achieve her financial goals, which include financing her retirement and possibly helping her parents when they're older, said Victoria Collins, an Irvine-based certified financial planner.
Runner will earn between $33,000 and $35,000 this year by juggling two part-time jobs--one at Occidental College in Eagle Rock and another at Pasadena City College. Her schedule, which includes at least 30 hours of work and about eight hours of class each week, is actually cushy by Runner's standards. Until recently, she had four jobs--the two she holds now plus positions at Cal State Long Beach and UCLA.
"I was in the car driving from one end of the county to the other all the time," she said.
Once she finishes school, her paycheck won't grow by much. Starting salaries in her field are in the $40,000 range--not a lot more than what she's making now working part time.
On the bright side, Runner is frugal. Even while supporting herself and paying for school, she's put aside about $14,000 in retirement savings and an additional $11,500 for emergencies. She has little short-term debt, and she contributes to both an employer-sponsored 403(b) retirement plan and an individual retirement account. Her 1991 Chevrolet Corsica is paid off, and the rent on her Los Angeles apartment is just $425 a month.
"I commend you for being thrifty and conservative with your expenses," Collins said. "It appears you are currently saving 11% of your salary. That is excellent."
Flexibility of Student Loan Repayment a Plus
Collins also was sanguine about Runner's copious student debts. Although the planner recommended that Runner use some of her short-term savings to pay off one relatively small loan--$2,002 at a 9.48% interest rate--the rest can wait until she graduates in about two years.
Collins noted that the loans have relatively low interest rates and, like most student loans, have fairly flexible repayment terms. When Runner graduates, she'll be presented with several repayment options, including one that will allow her to stretch repayment over three decades.
There's little downside to choosing the easiest repayment plan because she can prepay the loans without penalty. Meanwhile, the lower monthly payments give Runner flexibility, Collins said, in case she can't afford a larger outlay.
Still, Runner will have to do more if she wants a comfortable retirement, especially because there are a lot of "ifs" clouding her financial future, Collins said.
For instance, Runner is an only child and she fears that her parents might eventually need her financial help. Her grandmother was diagnosed with Alzheimer's disease at age 80 and has been largely taken care of by Runner's parents, who live in Modesto. Runner isn't sure whether her parents have saved enough to handle their own potential long-term care needs. If not, she'd feel compelled to help.
Moreover, she'd like to eventually get married, have children and maybe even take some time off work to raise them. But she and her boyfriend of seven years are still in school and haven't made that commitment. Still, if it happens, the joys and costs of marriage and children could put another wrinkle in her financial plans.
Based on Runner's current savings patterns, Collins predicts she'd have about $1 million at retirement. However, because of inflation, it's likely to cost Runner about four times more to live in retirement as it does today. Pulling about $100,000 out of savings each year would deplete Runner's savings by the time she's in her mid-70s--more than 10 years short of a woman's average life span.
Collins projections assume that Runner continues contributing about $7,000 a year to savings, her investments earn 8% on average and inflation averages about 4% per year--all fairly pessimistic assumptions.
The picture improves considerably if any of those variables changes, she said. However, the only variable completely in Runner's control is how much she saves.
"You want to save as much as you can," Collins said. "You also need to look at the money you've got and see how it's invested. At this point in your life, you want to invest as aggressively as you can."