Glenn and Robin Henderson of Hemet, Calif., enjoy a hike with son, Jeremy.More Reality Checks See what a financial adviser might recommend for you by selecting from one of our Reality Check Personal Profiles. Be a Reality Check subject If you would like to be a "Reality Check" subject and get free financial advice from a certified financial planner, send us an e-mail with your name, phone number and a brief description of your financial issues. |
Reality Check Facing financial anxiety of changing careers at 50 A California couple faces the common challenge of saving for the future while getting out of debt. But taking a shot at a new job is making it a 'white-knuckle experience.' By Melanie J. Mavrides Changing careers when you're nearing 50 years old takes courage, along with a dose of blind faith that things will eventually fall into place. That's what the Henderson family found after Glenn Henderson left a 25-year career in retail to pursue a teaching position. "It's the anxiety that can get to you," says Glenn's wife, Robin. "You don't know if you'll get a teacher's contract at age 50, and sometimes it's been a white-knuckle experience." Before abandoning his longtime job as district manager of a large drugstore chain, Glenn had been relatively content. But when his company was bought out, he began working a high-stress, six-day workweek with little energy for much else. He decided to ditch the rat race in favor of a long-held desire to teach. Living on Robin's salary alone has been an adventure, she says. Certainly, the couple has made the requisite sacrifices -- like cutting back on such frivolities as eating out -- to keep debt from mounting too high. Still, they wonder if they are on track to meet their retirement goals, and whether they'll be able to buy a house in the near future. We asked Karin E. McKerahan, a certified financial planner based in Temecula, Calif., to counsel the Hendersons. After meeting with the couple, Karin says: "The challenge for the Hendersons is to balance saving for their future with getting out of debt and living well with a lower household income." Names: Robin and Glenn Henderson, ages 45 and 49, respectively, of Hemet, Calif. The couple has two sons: Travis, 20, and Jeremy, 17. Occupation: Robin earns $59,000 a year as a hospital medical technologist. Glenn hopes to graduate with his teaching certificate by June and get a job next September. He currently is collecting $920 a month in unemployment compensation. If he lands a high school teaching job, he expects to receive about $35,000 per year when he begins working in the fall of 1999. (His former salary was $55,000 per year.) Assets: The couple has most of its assets -- about $324,000 -- in tax-deferred retirement plans. Glenn has $180,000 in a 401(k) plan from his previous job. Robin has about $120,000 in a tax-deferred compensation and thrift plan through her job. The couple also has about $15,000 invested in mutual funds, $9,200 in an individual retirement account and about $1,000 in a savings account. At the time of this writing, they were waiting for a tax refund of about $6,000. Liabilities: Glenn has accumulated student loans of about $21,000. Overall, the couple's monthly expenses include: $775 in rent for a three-bedroom house; about $911 for car, health and life insurance; about $250 for utilities; and about $650 for groceries. Robin puts about $425 a month into her retirement plan. Total expenses are $3,960 (payments for credit cards and student loans vary each month and are included in this total), compared to their after-tax, take-home pay of $3,715. (Credit cards have been used in addition to their income, says McKerahan. As a result, they have accumulated about $5,000 in credit-card debt, she says.) Financial goals: Paying off student loans and saving for retirement are the Hendersons' main goals. In about three years, they also want to buy the home they are currently renting. (The current owner of the home plans to credit the rental payments they have made toward a down payment.) Their older son, Travis, is going to pay for his own college education. He is enrolled in a community college and plans to pay most of his own tuition bills. However, the couple has set aside about $8,000, which is invested in U.S. government E series savings bonds. Jeremy, a high school junior, wants to be a firefighter and may not attend college. Adviser's recommendations: The good news The Hendersons' financial situation is better than they might think, says McKerahan. The debt they have incurred is not due to spending beyond their means, but rather because of Glenn's career change. Plus, the couple has been saving for retirement diligently. The challenge The Hendersons' low cash coffers could be trouble if a financial emergency or unexpected expense arises. They also need a better plan to pay off their mounting debt. "Their final challenge is to avoid getting deeper into debt until Glenn is ready to work full time," McKerahan says. Emergencies happen Few people actually save enough money for emergencies until a crisis affects their lives. The Hendersons are no different. McKerahan suggests taking part of the couple's impending $6,000 tax refund and putting half of it into a money-market account for such emergencies. Use the rest to pay down credit-card debt, she says. | |||
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Robin says she's currently putting $266 into a savings account every other week. "That's what I had been paying on a car loan. After the car was paid off, I had my credit union keep withdrawing the money. It's a painless (way to) save," she says. Robin says she understands the importance of an emergency account. "We had two unexpected car repairs happen last summer," she says. "Glenn had $3,000 in repairs last year alone." McKerahan says she would like to see the couple save even more. One way to save money is to reduce their upfront tax withholdings, McKerahan says. Right now, McKerahan calls the tax rebate the couple is expecting to receive an "interest-free, $6,000 loan (they had made) to the government, while they were paying interest on their credit cards," she says. Debt repayment and budgeting: Once their withholdings are adjusted, there should be another $500 a month available to reduce debt, McKerahan says. If they pay $600 a month on credit cards, the debt will be repaid in 12 months, she says. And once the credit-card debt is paid off completely, the $600 a month could be used to build an emergency cash account for at least three months' worth of living expenses, or about $12,000, she says. | |||
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For now, half of the couple's tax refund should be applied to the Hendersons' credit-card debt, McKerahan says. (The couple wisely has been transferring the debt from one introductory, low-interest 3.9% credit card to another, she notes.) The Hendersons also need to eliminate "non-essential spending" of about $75 to $100 a month, she says. Retirement tips: When Glenn begins teaching, he should contribute 10% of his salary to a tax-deferral plan. Robin also should continue to save about 10% of her pay. Overall, if they continue to save 10% of their incomes consistently -- or $9,400 a year for the next 15 years -- they can expect to have about $1.6 million of retirement savings, which assumes an average annual rate of return of 10%, McKerahan says. In addition, as the Hendersons near retirement, they will need to reduce the amount of stocks or equity mutual funds they hold in favor of lower risk bonds and cash, McKerahan suggests. Until recently, Glenn had invested his retirement monies mostly in one company. That's too risky, McKerahan says. About $85,000 of his portfolio had been invested in Sempra Energy (SRE, news, msgs), a conglomerate whose holdings had included Thrifty Drug Stores (Glenn's former employer), which was then sold to Rite Aid. The rest of the money had been invested in four Prudential mutual funds. They include Prudential Government Income (PGVAX), Prudential Jennison Growth (PJFAX), Prudential Stock Index (PDSIX) and the Prudential World Fund (PRGAX). The Hendersons took Glenn's 401(k) and rolled it into an IRA. They also considered diversifying their retirement portfolios, as McKerahan had suggested. They chose several funds based on a friend's recommendations. (The friend, who once worked with Glenn, is now a financial adviser.) Now, the $85,000, which had once been invested in one company, is invested mostly in no-load funds. Here's a breakdown:
Robin says she took a "shotgun approach" to picking the Aetna funds. Her money is invested in mutual funds offered by her company: 69% is invested in Aetna Growth and Income (AAGIX), 10% in Aetna Bond Fund (AEBAX), 7% in Aetna Money Market Variable Performance Fund, 4% in Aetna Unitized Fixed Account and 2% in Aetna Balanced Variable Performance's 401(k). Another 2% is invested in Fidelity's VIP Growth Portfolio. The remaining 6% is invested in a mix of Janus Aspen Series Aggressive Growth (JAAGX), Portfolio Partners MFS and the Fidelity VIP II Contrafund Portfolio (FCONX). "I'm trying to pull my money out of fixed accounts and low performers and moving it to what I hope are better choices," Robin says. | |||
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Estate planning The Hendersons need a will to ensure that their assets will be distributed according to their wishes, McKerahan says. An estate-planning attorney can also review their life insurance needs and costs. Currently, the couple is paying about $31 a month for a $200,000 life insurance policy on Robin. But Glenn has no life insurance. Since the couple's younger son still is a dependent, Glenn should consider getting term life insurance, she says. Home sweet tax advantage: The Hendersons also should consider buying a home for the tax benefits and the opportunity to build equity. In 2003, their current landlord plans to offer them the $90,000 home they are now renting. And the Hendersons should plan now to accumulate savings for any home improvements. "Hopefully, when Glenn starts working and they pay down debt, they will have the additional income to save for down payments and home improvements," McKerahan says. Back in 1994, the Hendersons had one setback that marred their credit record. Their lenders foreclosed on a 2,800-square-foot "dream house" they were building on a scenic hill overlooking a valley. It's not gloom and doom, however, McKerahan says. By the time 2003 rolls around, the foreclosure no longer will interfere with the Hendersons' ability to get a mortgage at a decent rate. Nine years will have elapsed, a good amount of time for their credit record to be cleaned up, she says. A follow-up: Help from a financial adviser greatly put the Hendersons' minds at ease. They're on track to meet their goals, McKerahan says. Says Robin: "Meeting with Karin forced me to look at the whole topic of money, which bores me to death. I'm a microbiologist. I like looking at disease. The whole (experience) forced me to take a painful look at how much we owe. And we now realize we're not so bad off." | |||
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W E B S I T E Cambridge Advisors |
About the adviser
Karin E. McKerahan is a certified financial planner and registered investment adviser based in Temecula, Calif., about an hour north of San Diego. She has more than 11 years of experience advising individuals and small-business owners. She has an MBA and a bachelor's degree in finance. She is a member of, and has a Web page under, Cambridge Advisors, a network of fee-only financial advisers serving middle-income clients. She is also a member of the National Association of Personal Financial Advisors and the Institute of Certified Financial Planners.
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