After reading the August 2012 Black Enterprise Financial Fitness Contest winner’s story, Michael McElroy, 34, and his wife of three years, Nia, 38, realized they were not saving nearly enough for the life they pictured in retirement. The August winner, Curtis Hoosier, had already amassed $80,000 for retirement at just 31 years old, and earned $63,000 less than the Houston couple. “I’ve always read these case studies and a lot of times people who make less money have more savings, and it intrigues me,†explained Michael as to why he and his wife sprang from bed at 1:50 a.m. to apply online for the contest.
“I’ve been on my job for 11 years, contributing to my 401(k)–the minimum, probably. I feel badly that I don’t even know that. I know better than not to know that,†admits Michael, who has amassed $20,000 in retirement savings at Travelers Insurance where he works as a unit manager. Nia has only $16,000 left in her 403(b) retirement account that she contributes to through her job as a college access coordinator, where she helps high school students gain access and admission to college. She made two early withdrawals. Her last such transaction was in 2009, when she withdrew $11,000 to pay for her nuptials–a move that came with penalties and taxes.
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The McElroys have just been living and paying their bills as they come along. The only goal they actually made, about a year ago, was to get rid of credit card debt and they have
worked to eliminate $10,000 of that so far. After getting married and seeing their combined credit card debt escalate from his existing $10,000 or so to $15,000, which included the cost of the honeymoon and the wedding ring, Michael decided last year he wanted to be debt free. He began eliminating the debt in less than a year by making monthly payments of more than $1,000. Nia’s credit cards still have a balance of $5,000 and she is still paying $500 a month. “That frustrated me that if I didn’t have these credit cards, I’d have a lot of money left over to save,†says Michael, who wants an emergency fund of at least $20,000.But even with credit card debt the couple still says they have about $1,700 left over each month after they pay all of their bills, and additional expenses such as grooming and charitable donations they find it challenging to create a financial plan. Still, they find it challenging to create a financial plan. They’re not really sure how much they should be contributing toward retirement and savings, or what it will cost to send their 2-year-old daughter, Maci, to college in 2028, or how much it will cost to protect their current assets.
“We just want to have a decent amount of savings and other investments. We’re not sure what type of investments, but we want to put our money in places where it can actually grow,†says Nia of why they need help creating short- and long-term goals that they can achieve.
The Advice
Black enterprise and Gene Austin, an investment professional and owner of Austin Financial Strategies New York City, offer this advice.
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Set financial goals. In order to create the financial life that you want you have to translate it in your own terms. Clearly defining what your goals are will make you more excited about creating a strategy to reach them. The McElroys should start by creating a list of specific short-, mid-, and long-term goals. So far they have been casual in their goal setting, generally saying, “I want to be debt free.†Get specific. Instead say, “I want to pay off all of our credit card bills by March 2013,†advises be. That is a goal you can put a future price on and can calculate. “If they continue to allocate $1,000 toward paying down credit card debt, the credit cards will be paid off within five months,†says Austin. They should continue this process until they have listed all of their goals, set target dates, estimated the cost, and budgeted for each goal. After paying off their credit card debt they can then begin to tackle other goals, and “then reallocate the $1,000 toward savings,†says Austin.
Establish an emergency fund. The couple estimates that $20,000 is a good savings number that they would like to have in an emergency fund. Although $20,000 may sound like a nice cushion, should they become unemployed, just their monthly expenses alone will quickly absorb the fund in about three months, Considering this
economy, individuals are out of work longer and other costs such as medical expenses or home and car repairs could send them back to relying on their credit cards. The McElroys should save at least six months of their expenses, or about $40,000, in a liquid savings account. They should use the $2,000 winnings from the contest to establish the fund and put their savings on autopilot.(Continued on next page)
Figure out retirement goals. Austin points out that a retirement account “should not be used as a piggy bank.†It is strongly advised that Michael contribute at least $5,000 per year to his 401(k), to get his company match. At that rate, assuming annual salary increases of 3% and investment returns of 8%, Austin estimates Michael’s 401(k) portion of his nest egg may grow substantially and could exceed $1.1 million within 25 years. “If Nia continues to contribute 3.5% of her salary to her 403(b), this account will have approximately $400,000 when she retires,†predicts Austin. Once the McElroys set personal long-term goals and work with an adviser, they may want to increase these numbers based on their anticipated lifestyle in retirement. Michael periodically receives bonus compensation. “A conservative approach for the McElroys would be to treat this as ‘found’ money, formulate a budget from his base salary, and apply these and any tax refunds toward savings and retirement goals. If they make lump sum contributions of at least $8,000 into an IRA at tax time and make periodic monthly contributions of $900 into preferred tax vehicles, they could generate more than $1 million in additional retirement savings,†says Austin.
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Increase insurance protection. Nia has $160,000 in insurance and Michael has $240,000 in a term life policy. Michael’s coverage represents 2.7 times his income and Nia’s coverage represents 2.9 times her income. According to Austin, “To provide the minimum recommended level of protection for the care and educational needs of their 2-year-old daughter and spousal income needs, combined with mortgage protection, no less than 20 times their annual income is advised.†Therefore Austin suggests that the McElroys as a couple have no less than $3.3 million in combined life insurance coverage. Austin also recommends that the McElroys consider a combination of both term and permanent insurance, which would contain a cash buildup component that can supplement their emergency fund and their daughter’s education. Austin estimates that “a monthly allocation of roughly $800 will not only provide an adequate amount of coverage, but also generate an additional $230,000 of monies that can be used to supplement their retirement income.â€
Diversify college options. According to the College Board report Trends in College Pricing 2011, private school tuition, fees, and housing are presently more than $40,000 and are projected to be more than $100,000 by the time their daughter attends college in 2028. Austin recommends “the McElroys seek diversification among various college funding vehicles to include a 529 college savings plan, a Coverdell [education savings] account, a Uniform Gift to Minors Act custodial account, and a life insurance policy.â€