The Whittingtons have it together. Dwayne and Hermennia, who goes by “Mina,” are both college educated, and Dwayne has an M.B.A. With an income of $120,000, the couple ranks among the top 6% of African American households. Furthermore, their net worth exceeds $200,000, largely because, between the two of them, they’ve stashed away more than $165,000 for retirement. The Sicklerville, New Jersey, couple is only four years away from kissing their mortgage goodbye.
Dwayne and Mina, both 42, have established a solid financial foundation for their sons Michael, 17, Marcus, 15, and newborn Malcolm. But why settle for good, when they can have financial freedom?
First, though, the Whittingtons must confront the debt created in the early part of their 20-year marriage. There was always something to buy for the four-bedroom house. And for the two boys, there were clothes, Christmas presents, and more to buy. Before long, they had run up a lot of debt. Today, they owe more than $26,000 on credit cards. The boys’ college expenses are on the horizon, and the Whittingtons haven’t set aside funds for college costs. They hope to tap the equity in their home or, if necessary, their retirement savings.
Meanwhile, the Whittingtons are looking to trade up to a bigger home in a few years. By age 55, Dwayne, an investment banker and Mina, a postmaster with the U.S. Postal Service, say they would like to be retired.
Past debt is problematic, but they are not discouraged. They’re likely to put the $2,000 contest winnings toward making a dent in those credit card bills. They have learned from past mistakes and are more disciplined about sticking to a budget. “I’m pleased that we have a lot of equity in our house and, overall, we’ve not done badly. But, there’s room for improvement,” says Dwayne. “Even though I have a financial background, we still need guidance.”
THE ADVICE
To move the couple further along on the path to financial independence, David Hinson, principal at Wealth Management Network in New York City, analyzed their situation. He identified several risks to their financial success.
The Whittingtons have no emergency fund. If one or both were to lose their jobs, they do not have the money to sustain themselves without tapping into retirement funds. They have just $250 in checking and savings accounts. “This is a major structural risk,” says Hinson. They could use the $2,000 Financial Fitness Contest winnings to start their fund.
Even more significant, the Whittingtons’ assumptions don’t add up. “While the Whittingtons maintain a budget without many frills, their spending is still more than they can afford, given their goals of providing for their sons’ education, while simultaneously seeking financial independence,” says Hinson.
The Whittingtons have almost $170,000 in retirement assets, but that is not nearly enough to consider retiring at age 55. To achieve financial independence, assuming current spending levels and adjusting for 3% annual inflation, they would need about $1.47 million of investable assets by age 55, says Hinson. Building that kind of reserve while trying to fund the children’s college education is likely beyond their reach.
But what really concerns Hinson is the Whittington’s psychology on money. “Dwayne considers his home the piggy bank. He considers tapping into retirement assets as ‘no big deal’ if necessary.” Hinson says the Whittingtons don’t show enough concern about their credit card debt. And he is concerned that Dwayne, “considers retiring early as reasonable, all while he is thinking about buying a bigger home and taking money out of the home to pay for the children’s education.”
WEALTH CREATION 101
Hinson devised a wealth-creation strategy for the Whittingtons:
DEVELOP A SECONDARY WEALTH-CREATION VEHICLE
Right now the family is relying solely on the savings from their combined corporate incomes. Given the economic climate, having all their hopes on one golden egg is too risky. Hinson recommends they pursue investment real estate. Not only does the couple have an interest in doing so, but Hinson says over time, it would provide a secondary income and an educational funding source. Ideally, between now and retirement, he would like them to buy as many as seven properties. To get started, they should choose properties that are close by, for ease of management. Once they’ve learned the ropes, they should diversify into other areas. They will need to craft a real estate investment plan.
EXTEND RETIREMENT AGE
While retiring at 55 sounds good, it’s nearly impossible, unless the Whittingtons hit the lottery. The couple should wait until age 62, thereby giving themselves a 20-year window to continue preparing for their golden years. They should maintain an 80% equities to 20% fixed-income investment mix in their portfolio during much of that time.
MAXIMIZE RETIREMENT SAVINGS
Mina puts the maximum 14% of her salary into her thrift savings plan at work. Dwayne says he is committed to doing the same starting this year. In addition, Hinson says they should open an IRA and make the maximum family contribution so that they can reap the tax benefits.
REFINANCE MORTGAGE TO EXTEND AMORTIZATION TO 30 YEARS
Although the Whittingtons recently refinanced and have only four years to go on their mortgage, Hinson explains, “In shorting their amortization they are paying off their mortgage faster, but in doing so, they are eliminating a primary tax benefit. And they are increasing equity in an illiquid asset class, while simultaneously leaving high interest credit cards and other debt instruments intact-a very inefficient financing approach.”
Consolidate debt with refinancing proceeds. Currently the Whittingtons have an estimated net equity of $44,000 (equity net of first and second mortgage, and a 20% holdback of equity in the property). Hinson says they should attack their debt as follows: $13,800 toward Dwayne’s debt, $6,048 toward his car, and $16,400 toward Mina’s debt. This would clean up their balance sheet as they prepare themselves to invest in real estate. Also, he says they would free up $20,000 in annual cash flow, reduce their monthly cost structure, and free up debt capacity-a plus in the event either becomes unemployed or some other unpleasant circumstance arises. After debt reduction, they would have about $7,000 in cash, enough to allow them to begin shopping for that first piece of investment real estate.
FINANCE COLLEGE ON THE BACK END
“You can fund a college education, not a retirement,” says Hinson. He strongly discourages the couple from taking money from their retirement savings. In addition to seeking out grants and scholarships, he offers this approach, “Agree to fund student loan payments for the first two years after college. This would help their son during his most critical financial window and provide four additional years for them to accumulate the money to fund the debt,” says Hinson. The couple’s oldest son plans to attend South Carolina State at an estimated cost of $50,000 over four years. The monthly student loan payment after the 2.5-year grace period would be approximately $500 per month, quite doable, given the Whittingtons’ new cash position.
DEVELOP A CORPORATE INCOME ENHANCEMENT STRATEGY
Simply put, the Whittingtons need more income to live the life they want. Hinson suspects they are undervaluing their
increase their networking activities and work on developing stronger relationships with key managers.
THE OUTLOOK
Hinson’s advice about refinancing is a bit hard for Dwayne to swallow because he and Mina are so close to paying off the mortgage, but he understands the potential benefits.
“There’s the possibility that we might lose our jobs. If we had our mortgage paid off, we’d have a roof over our head at least. We could still buy investment property; it might just be at a slower pace. I’m not sure I’m comfortable leveraging the house,” says Dwayne.
Hinson is optimistic about the couple’s future and would like them to invest in themselves by continuing the financial planning process. “They need to finish what we started-to get the quality professional information and advice that will help ensure that they achieve financial freedom.”
Dwayne credits Hinson for getting him and Mina on the same page. They were doing things separately, which is why they were somewhat surprised at their total outstanding debt. They have done a new combined budget with no big gaps, says Dwayne. “We’re refining our five-year plan. We now know where we want to go and have a map to get us there.”
Winner No. 43 Hermennia & Dwayne Whittington
Financial Snapshot:
|
HOUSEHOLD INCOME |
|
| Gross Income | $120,000 |
|
ASSETS |
|
| Thrift Savings Plan (retirement) |
$150,000 |
| Market Value of home | 130,000 |
| Three cars (his, hers, and oldest son) |
22,430 |
| Profit Sharing Plan | 16,000 |
| American Express brokerage account | 900 |
| Stock Options (200 shares at $28 strike price) |
650 |
| Checking and savings accounts | 250 |
| Total | $320,230 |
|
LIABILITIES |
|
| First Mortgage | $36,000 |
| Credit card debt | valign=”middle”>26,700 |
| Second Mortgage | 23,841 |
| Three cars | 22,648 |
| Personal loan | 3,500 |
| Total | $112,689 |
| Net Worth | $207,541 |