Thirty-one-year-old Michael Haney knows what he wants—to be a millionaire by age 60. He has looked at various ratios in meeting his goal to become debt free at age 40 and to amass half a million dollars by age 50. However, Haney’s goals may be a little ambitious. Even with the potential appreciation on a home in Reading, Pennsylvania (appraised market value of $186,000), Haney would need to invest $1,000 a month to reach $570,000 in 20 years and $1.4 million in 30 years (calculations assume an 8% return compounded monthly). At the rate he’s going, investing a little over $250 a month, he can expect to accumulate roughly $352,000 by the time he is ready for retirement.
Haney, an analyst for an industrial battery firm, pulls down an annual gross salary of $40,000, while his wife, Regina, earns $35,000 working as a hair stylist at a local salon. After four years of marriage, the Haneys, who have two sons (Javar Colon, 10, and Christian, 3), have only recently begun to work together to save for their retirement and their sons’ college education. Michael has a 401(k) plan at work worth about $5,000, to which he is contributing 7% of his pay, and Regina has a profit-sharing plan worth about $8,500, to which she kicks in about $80 a month. The couple also set aside $50 biweekly in a 529 college savings plan, valued at about $2,000.
After giving birth to their second child, the Haneys realized they needed extra space. So, they sold their home and had a four-bedroom home built from the ground up. “We enrolled in a credit monitoring program, where we received advice on our personal credit scores, who’s looking at them, and how we could improve our scores,” Michael says. (Mortgage lenders look at credit or FICA scores, which range from 300 to 900 points with anything under 620 considered a poor credit risk). The couple worked hard to save up the down payment, 15%, on the new home. To help with the down payment and pay down some debts, Michael borrowed money from his 401(k) plan. Michael used the proceeds from the sale of his first home to accelerate some debt payments, putting $5,000 toward his student loan and $3,000 toward the car note on his 1996 Lexus.
The Haneys segregate their finances, meaning they have separate checking and savings accounts. Part of the reason is that Regina, 29, has bad memories of the financial challenges during her first marriage. Now the couple is learning to work on setting a reachable goal for their retirement, together, not apart.
THE ADVICE
The Haneys need to be very conscious of their spending habits in order to meet their10-, 20-, and 30-year financial goals and to expedite the process of accumulating wealth. Otherwise, they will have a cash shortfall come time to retire, cautions Walt Clark, president and CEO, Clark Capital Management in Baltimore. We had Clark consult with the Haneys.
“After discussing the projections he’s using, and, taking the appreciation of their home out of the equation, it would be somewhat difficult to reach his goal at his current rate of investing,” says Clark. There are things, however, that the Haneys can do to improve their economic outlook.
The couple should establish a five- or even three-year time frame as to how long they will cut back on outside expenses. They need to make some lifestyle changes, such as going from leasing a car to owning a car. Every three years, Regina leases a new car, which costs $1,000 each time she makes the swap. She is paying $440 a month on a 2003 Toyota 4Runner, but Clark says she would save money in the long run if she eliminated the leasing option and bought a car outright.
PAY OFF DEBT
The Haneys need to do some consolidating. The couple refinanced
MAXIMIZE INCOME
Clark suggests Michael take the savings and begin investing $150 in his mutual fund, the T. Rowe Price Capital Appreciation Fund, and $150 in the 529 college savings plan. Moreover, Michael should bump up his 401(k) contribution to 15% of his salary (or the max). Roughly half of the money in his 401(k) is invested in an S&P 500 index fund and the other half is in a balanced fund. Clark recommends keeping the S&P 500 fund but switching the other to a mid cap or large cap growth fund, a more aggressive option that’s appropriate for his age and the
OPEN UP SECOND529 PLAN
Clark suggests opening a second 529 plan because the gains are tax-free and the contributions provide a tax deduction to the plan owner. He further suggests moving the money in their current 529 plan out of the Alaska Fund and into the T. Rowe Price S&P 500 Index Fund, as the S&P 500 Index has outperformed 90% of all mutual funds in good and bad times.
REVISIT ESTATE PLAN
Clark adds that the couple needs to better protect their assets, which includes purchasing additional life insurance and acquiring disability insurance (they both have a good 30 years left to work). While Michael has a life insurance policy at four times his pay, he could get a term policy for a minimum of $250,000 at a cost of about $19 or $20 a month considering his age, assuming he’s in good health.
Winner No. 43, Michael & Regina Haney
Financial Snapshot:
|
HOUSEHOLD INCOME |
|
| Gross Income | $75,000 |
|
ASSETS |
|
| Checking (his) | $1,000 |
| Checking (hers) | 600 |
| Mutual Fund (his) | 700 |
| Mutual Fund (hers) | 2,000 |
| 401k (his) | 5,000 |
| Profit-sharing (hers) | 8,500 |
| 529 Plan | 2,000 |
| Home (market value) | 186,000 |
| Car (his) est. Blue Book value | 11,000 |
| Total | $216,800 |
|
LIABILITIES |
|
| Student Loans (his) | $6,000 |
| Credit Cards (his) | 4,700 |
| Car Note | 6,000 |
| Credit Cards (hers) | 8,000 |
| Mortgage | 141,000 |
| Total | $165,700 |
| Net Worth | $51,100 |