Couple need to cut costs, invest more for retirement
This week we look at a hypothetical couple worried about recovering financially after an accident with their son.
Tina, 52, and Eric, 48, are Colorado natives raising their family in Castle Pines North. Eric is an accountant and Tina an estate planning attorney. They have each built a strong business and are able to refer business to one another. Working out of their home has allowed them to be very involved with their two teenage sons.
Tina and Eric’s oldest son has played football since he could walk. Unfortunately, he has had many concussions on and off the field. In 2015 their son collapsed while playing; thankfully he is doing much better, but the family incurred a $12,000 deductible and $18,000 of medical expenses — as a result wiping out their savings.
In business for themselves for 18 years, each spouse takes a salary of $80,000 per year and an additional $60,000 draw from their respective companies. Since both withdraw the same wage from their business, each spouse’s Social Security is projected to be about $2,300 per month at age 67 or $2,915 at age 70. They spend everything that goes into the personal checking account from their businesses, which is $214,000 per year after tax. They would love to retire in the next eight years, with the same income, once both kids are through college. One of their biggest irritations is spending $14,400 per year on health insurance for their family.
Tina and Eric have accumulated very well with just over $1.3 million in retirement accounts, to which they add $82,000 each year. They have $55,203 in an individual investment account after the medical bills and a surprise tax bill of $70,000 that same year. Each spouse has $100,000 in universal life insurance, with the cash value earmarked for their sons’ college. Tina’s has an accumulated value of $48,000, and she deposits $750 per month into it. Eric’s is valued at $46,000, and he deposits $700 per month into it. Their term life insurance lapsed the year they were engulfed with their son’s recovery.
Their biggest question is “How do we rebuild our savings and plan for retirement while still helping to fund higher education for both of our sons?”
Tina and Eric are doing extremely well and above all else their son is OK! The couple did all that they could to mitigate the risks could control. I empathize with their frustration with insurance premiums, yet the insurance did its job. A leading cause of bankruptcy and home foreclosure is medical bills, and their insurance successfully protected them from that.
Eric and Tina said retirement is their biggest concern. They have a very common conundrum among people beginning to get serious about their retirement savings. In order to match their current spending for retirement in only eight years, they would have to invest $258,000 per year each year for the next eight years. That’s more than they make so obviously not achievable. If they keep investing the $82,000 per year they do now and work until they have enough assets to generate their target income, they’d have to work well into their 80s. If the keep investing the $82,000 they do now for eight years, they could retire spending $87,540 after tax, and increase that with inflation. That’s an option, but a big change in lifestyle.
Tina and Eric have obviously focused and succeeded in generating income. Now they need to look for places to spend less. Controlling their spending will give them more money to invest, and as they get used to spending less and saving more they’ll close the gap needed for retirement. Additionally, although they want to quit in only eight more years, they can work a few more years to close the gap as well.
Tina and Eric have a few contractors that work for them, but no full-time employees. As they find more money in their cash flow to invest, they can explore the possibility of creating a “Defined Benefit Plan” which would allow them to invest much more pretax than their current 401(k) plan.
Their sons work part time in the family businesses managing social media and doing clerical tasks. Tina and Eric have never paid them a wage for their work, but can do so, therethey by shifting some income into their sons’ low tax brackets and allowing them to save for their future college expenses. When the time comes for college, the couple can deposit into a 529 plan the amount needed as each semester is due and receive the Colorado state tax deduction.
They should contact their insurance company and make sure they are depositing the maximum “nonmec” amount into their life insurance policies, and if not raise the monthly deposits. These policies can be a place to build up cash value with tax deferred growth. They also need to replace their lapsed life insurance with a minimum of $1 million of coverage each, 15- or 20-year level premium term life insurance.
Pam Dumonceau has 24 years of experience and is the principal of Consistent Values, a registered investment advisory firm in Greenwood Village.