Cou­ple need to cut costs, in­vest more for re­tire­ment

The Denver Post - - BUSINESS -

This week we look at a hy­po­thet­i­cal cou­ple wor­ried about re­cov­er­ing fi­nan­cially af­ter an ac­ci­dent with their son.

The sit­u­a­tion

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?”

The rec­om­men­da­tions

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.

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