Commencement Day
by Jane Ricardi and Jack McGrathAs Judy and Bill Schardin sat at their youngest daughter’s college graduation, savoring the moment of pride for their daughter, Lindsey, a realization began to set in. This was their third child to finish college and the tuition bills were now gone – along with the monthly expenses associated with a child in college.
“This is great!” Bill thought. “Now we’ll have lots more disposable income to work with. Forget empty nest syndrome, now Judy and I can do some things we have forgone over the last eight years of education expenses.”
“We’ve always wanted to go to Italy and Paris, that would be fun … but the house is in dire need of repairs and Judy has always wanted a seasonal porch … and how about that BMW I’ve had my eye on ….”
“But wait a minute – I haven’t saved much in the last eight years for retirement and now we have school loans to repay. I think we need to get some professional help. We really need some help setting our priorities in order.”
Judy and Bill, both age 53, have enjoyed a close family life with their two sons and daughter. Bill makes about $150,000 per year as a CFO for a data management company and Judy makes $50,000 per year as a human resources administrator. While they enjoy a healthy income, the last eight years have put a strain on their budget trying to support their children through college.
Funding the college expenses depleted their savings considerably and decreased their ability to fund their 401(k)s. The good news is that all three children are launched into careers, and now the Schardins can focus on the next phase of their life.
Current situation
Assets
Emergency fund – cash $ 7,000
Mutual funds $25,000
IRAs $40,000
401(k) – Bill $198,000
401(k) – Judy $46,000
Real estate $550,000
Total $866,000
Liabilities
Mortgage @ 6.00% $150,000
Parent loans @ 7.50% $45,000
Net worth $671,000
The financial makeover plan
After gathering the current data, the next step is to set some realistic goals that will provide for the future and allow the Schardins to address some pressing needs, such as the home repairs.
Goals:
• Increase emergency fund to $25,000
• Accelerate 401(k) contributions in both plans
• Home improvements – $40,000
• Vacation – $10,000
Both Judy and Bill recognize the need to build a large nest egg in order to enjoy a comfortable retirement. Bill thoroughly enjoys working and has no desire to retire early at this time. Judy dreams of retiring at age 60 or 62 to pursue her love of gardening.
Monthly take-home pay is $8,360 and monthly expenses to run the home and debt repayment is $4,300. Now that the tuition payments and associated expenses are gone, the Schardins now have excess funds of $4,050 to begin working on the goals.
Currently, Judy and Bill both contribute 6 percent of their pay to take advantage of the 3 percent match from their employers. We suggested they increase their contribution to 10 percent of salary, with the ultimate goal of trying to max out the contribution in Bill’s account to $20,500.
Because Bill is over age 50, he is allowed a catch-up contribution of $5,000. This reduces the monthly take home pay to $7,950 and reduces the surplus to $3,650 for the remaining goals.
Building up an emergency fund is critical to the success of the Schardins’ future. Layoffs or downsizing could put this family at risk because they have no savings to fall back on. A healthy emergency fund would be three to six months of living expenses, which amounts to $12,900 to $25,800. The Schardins committed to setting aside $1,000 per month for the next two years to achieve this goal.
Judy is anxious to get the home improvements done immediately so they can enjoy their home. We suggested a home-equity loan with a fixed rate of interest to take advantage of the lower interest rate at this time. While this increases their debt burden, their overall debt ratio is low and will not impact their cash flow dramatically.
In addition, the interest on the loan will be a deductible expense on their tax return. The monthly payment will be $485 for 10 years. Once the emergency-fund goal has been met, they can accelerate principal payments to reduce the term of the note.
With the remaining surplus, Judy and Bill agreed to begin a vacation/car fund and save as much of the remaining surplus as possible, with the hopes of traveling to Europe in 12 months. The Schardins have always been careful with credit and prefer to pay cash for their cars and other purchases. This practice will serve them well as they begin to ramp up their retirement nest egg over the next decade.
Putting children through college is certainly a daunting task, but the Schardins have made it through and can move on to the next phase. With many years ahead of them, having a set plan in place will allow them to focus on their future and give them lots of options for retirement and be ready to adapt no matter what life throws their way.
Jane Ricardi and Jack McGrath are principals of McGrath & Ricardi Financial Group, with offices in Plymouth and Norwell. Ricardi can be reached at (508) 830-6893 or info@janericardi.com, McGrath at (781) 878-4063 or sfsjack@aol.com.
Published in Cape Business November/December 2007
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