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Reality Check Fired up for retirement, concerned about college costs A firefighter and a homemaker had hoped to retire at 55, but know diplomas won't come cheaply for three children. Should they be concerned? By Jennifer Mulrean Kevin and Diana are in a predicament shared by many families these days: Their dreams of an early retirement compete with the day-to-day costs of raising a family and plans to help with their three children's college expenses. Since Diana left her lab-tech job three years ago to be a full-time homemaker, they have managed to avoid financial fires at home while living on Kevin's firefighter salary of $70,000. They enjoy taking family vacations and boating on Hayden Lake, where they have a cabin just 40 minutes from their Eastern Washington home. Kevin and Diana's oldest son, Derek, has cystic fibrosis but is doing well under new drug treatments. A good health plan tempers the financial aspect of this hardship by covering thousands of dollars worth of monthly medical bills, leaving Kevin and Diana responsible for the prescription co-payments totaling between $70 and $100 each month. With the cabin nearly paid off and one car loan of $20,000, their debt consists mostly of the $200,000 mortgage on their primary residence. But at 42, Kevin is hoping he can retire in just 13 years with the house paid off, while maintaining their current lifestyle. The couple talked with financial planner Karen Ramsey of Seattle-based Ramsey & Associates to figure out how -- and if -- they can achieve their goals. Here's a breakdown of the family's current situation and Ramsey's recommendations: Names: Kevin, 42, Diana, 37, and their three children: Derek, 12, McKenzie, 3, and Madison, 6 months. City: Otis Orchards, Wash., just a few miles west of the Idaho-Washington border. Occupations: Kevin is a firefighter. Diana is a homemaker. Income: $70,000 per year. Assets: Principal residence, $275,000; lake cabin, $140,000; 1992 Chevrolet pickup truck, $10,000; 1998 Toyota Sienna LX, $23,000; 1972 Ford tractor, $6,000; and a 19-foot powerboat, $12,000. Their investment portfolio, valued around $50,000, is heavily weighted in large-capitalization stocks such as Microsoft (MSFT, news, msgs), America Online (AOL, news, msgs), Amazon.com (AMZN, news, msgs) and Cisco Systems (CSCO, news, msgs). Kevin also has $53,000 in his employer's 457(k) plan (a Fidelity equity income fund) and a Washington LEOFF II Firefighters Pension currently valued at $67,000. Total assets: $636,000 Liabilities: Visa credit-card balance, $6,000 at a 3.9% rate; a $200,000 home mortgage at 7%; a $3,000 mortgage on cabin at 6%; and a $20,000 car loan at 8%. Total liabilities: $229,000 Living expenses/net cash flow: The family's monthly expenses include $430 on their auto loans, $36 on their vacation cabin's mortgage and $1,500 on their home mortgage. Their total expenses, including their mortgages, loans, insurance, utilities, medical bills and discretionary expenditures total about $3,569 per month. Financial goals:
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Helping the kids with college Kevin and Diana have always planned on refinancing their lake cabin when it came time to help their children with college expenses. This certainly is an option, Ramsey says. However, with other goals such as retirement competing for the same funds, they need to consider having their children pay for their own college education; Kevin and Diana can help them with whatever money is left after the contributions to the retirement accounts have been made. | |||
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Retirement In order for Kevin to retire at 55 with their home paid off and maintaining their current standard of living, they will need to increase their retirement savings of about $10,000 a year to $27,000 a year, the planner says. With three children at home, this is not feasible at their current income level, she says. Also, since their current mortgage is at a good rate of 7%, they would be better off putting their money into retirement savings instead of paying off the mortgage early. Although retirement at 55 may not be possible for Kevin, he would only need to make half his current income level (adjusted for inflation) from age 55 to 65 to retire and maintain the same standard of living. | |||
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Insurance Looking at the amount of money that would be required to pay off the mortgage, help with college and allow Diana to remain a homemaker until the last child is in college, Ramsey says they would need about $682,000 of life insurance on Kevin. That's $382,000 more than his current policy. By conservative estimates, if something were to happen to Diana, Kevin would need full-time child-care services until the youngest child entered college, Ramsey says. A $300,000 policy on Diana would be necessary to provide for this. Currently, they have only a $50,000 term policy on her, so the family could benefit from increasing their policies on both Kevin and Diana. Summary Overall, the Kevin and Diana are doing fine. They have a lot on their plate with three children, but they are consciously trying to save for retirement. Kevin may have to work a little longer than he would like, but as long as they keep saving and watching their expenses, they should be in good shape when the time for retirement finally comes. Update The recommendations from the planner caused the couple to rethink many of their financial goals, Kevin said. "It clarified our desires a little more," he said. "Since meeting with Karen, we've been trying to push the fact that the kids are going to have to pay for (college) themselves." Though they haven't made any moves yet, the first item on their new financial agenda is to increase their life insurance policies. They intend to start increasing their retirement savings by the end of summer. Kevin says the idea to retire at 55 was a best-case scenario. He loves his job and so long as he can meet the physical challenge, he will continue working full-time as a firefighter until age 60. | |||
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About the adviser
Karen Ramsey is president of Ramsey & Associates Inc., a financial planning firm in Seattle. She is a fee-only certified financial planner with more than 15 years of financial consulting experience, and has spent 10 years working in personnel management and business consulting. She is also the author of the new book, "Everything You Know About Money Is Wrong." She is a member of the National Association of Personal Financial Advisors.
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