|
Empty Nest — The kids are out of school; what will you do with the extra money?
By Kate Peterson
Illustrations by Shane McG
 It was a simple, half-joking
comment that launched Mark and Margaret Magnificent's financial revolution.
"What are you going to do with all your extra money now that I've finished
college?" their daughter Meg asked shortly after graduation from Ivory
Tower University.
The Magnificents—Mark, a 60-year-old self-employed landscaper in Everytown,
U.S.A., and Margaret, a 58-year-old nurse's aide at the city hospital—had helped
with Meg's education, but their expenses were offset because Meg, the youngest
of their three kids, had earned a partial scholarship and worked on campus for
room and board the last three years of school.
The Magnificents didn't think they had spent much out-of-pocket for Meg's education,
but a quick review of bank statements showed they spent an average of $250 a
month helping with various costs. It was a watershed moment. They did have extra
money now that all of their kids were out of school. The dynamic duo jumped
into action to begin the next stage of their financial lives where they would
face retirement expenses, possible long-term care costs and a strong desire
to continue charitable giving.
Super Strategizing
First, the Magnificents examined their current finances. With $585 more in income
than spending each month, they needed to find the best way to use that extra
cash—either by investing or paying off debt.
With a $55,000 mortgage, $9,000 in car loans and $1,900 in credit card debt,
their first step had to be reducing high-interest credit card debt. Mark had
been reluctant to use extra cash in their checking account because his business
income often fluctuated.
Davon Bultemeier, senior financial consultant with Thrivent Financial for Lutherans
in Fort Wayne, Indiana, says families need to have cash to cover a minimum of
three months worth of expenses in case of emergency. The Magnificents had enough
cash between their checking account and a CD to pay off the credit card and
maintain that safety net.
Next, they began accelerating their car payments. Their aim was to go into
retirement without any consumer debt—an excellent goal for any family, says
Bultemeier. Since their mortgage rate was relatively low, they made no changes
there, and worked on building up their assets in advance of retirement.
Assignment: Plan Retirement
 Over their working years, the Magnificents had accumulated $55,000 in retirement
accounts, $75,000 in home equity and $50,000 in other assets. To begin their
task of serious retirement planning, they needed to meet with a financial professional
to compare their likely expenses in retirement with their income sources. "Meeting
with a Thrivent Financial representative helps families to determine if their
assets are appropriately allocated in terms of risk," says Don Swanson,
a senior financial consultant with Thrivent Financial in Libertyville, Illinois.
In the case of the Magnificents, it also gave them a reasonable idea of how
much longer they needed to work, and how much they needed to save in order to
reach their retirement goals. They agreed that from that moment until retirement,
they would invest all they could in retirement accounts—Margaret through her
job, Mark through a self-employed retirement account and both through Roth IRAs.
The Roth accounts would provide them an additional income option in retirement—one
likely to be tax-friendly, boosting their income potential.
Despite increasing monthly savings in advance of retirement, the Magnificents
were not willing to reduce charitable giving. But, they found they could continue
their generosity by giving shares of stock—which gave them certain tax advantages—and
freed up cash for additional retirement investing.
Guardians of Retirement Income
Next, the Magnificents assessed their insurance situation. Both had term life
insurance contracts they had purchased nearly 20 years before. The rates they
paid would rise within the year, and they had to decide if this coverage was
still appropriate.
While they did not continue those specific contracts, they still needed some
protection. They chose term contracts with smaller death benefits, and they
also purchased small cash-value contracts, which provided permanent coverage
for final expenses.
Even without young children at home, as they near retirement, life insurance
coverage for couples is important. "People at this stage in their lives
need to earn income at this level to continue saving in their working years
for retirement," Bultemeier says. "If something happens to one of
them, it will be a financial burden on the other."
Long-term Care
For many years, the Magnificents didn't even consider buying long-term care
coverage, thinking they couldn't afford it. On closer examination, they found
a wide spectrum of options with manageable costs.
"Today, long-term care costs can be $60,000 or $70,000 a year," Bultemeier
says, adding that, "at that rate, it doesn't take long for people to go
broke." Even coverage for a relatively short amount of time helps protect
the assets of the healthy spouse, Bultemeier says.
"For many people, three years of coverage may be enough," he continues.
"In addition, long-term care coverage gives people a choice of how and
where they are going to be taken care of in the event of an extended illness."
With their plan in place—complete with a healthy boost in retirement saving,
a strategy to eliminate consumer debt and a plan to beef up insurance coverage—the
Magnificents truly transformed their financial lives from average to, well,
magnificent.
Kate Peterson covered Social Security in the Fall 2005 issue of Thrivent
magazine.
How Superheroic Are You?
Fast facts about the average American baby boomer.
The first baby boomers will turn 60 in January 2006.
The average American man retires at age 62; the average American woman retires
at age 61.4.
-U.S. Bureau of Labor Statistics
The median value of retirement accounts for households headed by 55- to
64-year-olds is $55,000.
-U.S. Federal Reserve
The median income for families headed by 55- to 64-year-olds is $62,176.
-U.S. Census Bureau
Men who reach age 65 have an average of 16.6 years of life ahead of them;
women who reach age 65 live an average of 19.5 more years.
-U.S. Department of Health and Human Services
Median value of credit card debt for households headed by 55- to 64-year-olds
is $1,900.
-U.S. Federal Reserve
Median net worth for households headed by 55-64-year-olds is $181,500.
-U.S. Federal Reserve
Median value of a primary residence for households headed by 55-64-year-olds
is $130,000 while the median value of home-secured debt for the same group is
$55,000.
-U.S. Federal Reserve
Median value of installment loan debt (i.e. car loans) for households headed
by 55-64-year-olds is $9,000.
-U.S. Federal Reserve
Top Of Page | Magazine Home Page
|