Money Makeover

Tackle the basics before the portfolio

Email|Print|Single Page| Text size + By Lynn Asinof
Globe Correspondent / June 29, 2008

High school art teacher Sterling Worrell, 43, looks at his family's finances and thinks about retirement. Because he only started teaching public school nine years ago, he worries that he won't get full benefit from his Massachusetts Teachers' Retirement System pension.

But his wife, Colleen, 41, a part-time American studies instructor at Tufts University, has more immediate worries. She's been teaching evening classes so Sterling can care for their three children, ages 5, 7, and 8. With a mortgage, school loans, and a combined income of about $100,000, she's more concerned about paying the water bill than funding the couple's future.

"He's thinking retirement; I'm thinking day-to-day," she said.

Faced with these competing challenges, the Worrells applied for a Boston Globe Money Makeover, saying they needed help. "I am trying to put as much money as possible into aggressive 403(b) mutual funds," Sterling wrote in their application, but he wasn't sure that these efforts would make much difference.

When the couple sat down with fee-only financial planner Andrew Chan, however, their investment portfolio wasn't even on the agenda. Given the limited size of their investable assets, Chan said it made more sense for the Worrells to tackle basic planning before trying to redesign their investment portfolio. "Net worth and cash flow are the basis for all these other things," said Chan, an adviser with Family Financial Architects in Natick. He said he'd make investment recommendations after the basic plan was in place.

To prepare for their initial meeting, Chan told the Worrells to pull together not only a statement of their assets, but also a breakdown of their monthly expenses. "That was hard. We had never done that before," Colleen said, noting that the couple spent an entire day - without children - trying to figure out where their money went.

The resulting numbers weren't pretty. Granted, the couple was contributing $1,000 each month toward pension and other retirement plans, but they were also exceeding their income. One aggravating factor: the rising cost of gasoline. While the couple lives in Plymouth, Sterling commutes to Hopkinton and Colleen works in Medford. They've seen their monthly gasoline purchases jump to $600 from just $200, gobbling up $400 that they can ill afford to spend.

"I knew that we were living paycheck to paycheck, and this proves it," Colleen said.

The good news was that the couple had not only avoided credit card debt, but was steadily chipping away at both their mortgage and $53,000 of school loan debt that financed Colleen's doctorate degree. "We work really hard not to take on bad debt," Sterling said, noting that they are very aware of the importance of paying off their credit card balances every month.

But there are some planning areas that haven't gotten enough attention. They don't have wills, an emergency fund, or sufficient insurance, Chan said. To address those issues, he said, the Worrells need to come up with some money in their already tight budget. "There are only two ways to do that - increase income or decrease expenses."

It will be another year before all three children are in school all day and Colleen can start working full time. Until then, Chan suggested the Worrells look for those additional dollars by reviewing expenses. He told them to track all expenditures for the next three months, dividing each into one of three categories: "must have," "nice to have," and "not really needed."

"You don't want to cut out all the fun, but you do need to address the basics," he said.

At the top of the to-do list is estate planning. "You don't have wills," Chan said, noting that this is the document that will govern guardianship of their children. The two also don't have powers of attorney or healthcare proxies, needed should one or both become incapacitated. Given the couple's current assets, Chan said these documents don't need to be complicated. Still, he recommended that they see a lawyer rather than relying on Internet estate planning programs: The couple could take advantage of a Tufts benefit that provides legal services for a cost of about $9 a month.

The couple also needs an emergency fund. Chan said he would like to eventually see them tuck away $15,000 to $20,000 in a high-interest account. "In the event of a job loss or a disability, you need to have something to fall back on," he said. The couple may want to use automatic transfers from their checking account to fund both this account and a separate account earmarked for a new car, he said. "If you don't see it, you aren't going to spend it."

Insurance needs some attention, too. Chan said both Colleen and Sterling should check out possible disability coverage through work. They should also shop around to find out how much it would cost to increase Sterling's life insurance coverage by $350,000 to about $600,000. Once Colleen starts to work full time, she will also need to increase her life insurance coverage, Chan said.

Turning to retirement, Chan found that Sterling would qualify for the maximum pension benefit - 80 percent of the average of his three highest paying consecutive years' salaries - if he works to age 66. But he won't get much Social Security, since the pension program precludes his participation.

Even with that benefit, however, Chan's calculations - based on current earnings and lifestyle - show that the couple would start running out of money by the time Sterling turned 70. These retirement projections, however, will change significantly once Colleen starts earning a full-time salary and qualifies for a wider range of workplace benefits. Increases in Sterling's salary will also have a big impact.

When asked about college savings, the Worrells said they couldn't begin to address future tuition needs. "For us, that's a luxury item right now," Colleen said.

In some ways, the makeover was a bit premature, Colleen said, noting that the couple doesn't yet have the dollars to fully implement Chan's proposals. "But once we do this work, the foundation will be there," she said, noting that it will serve as a template for managing the extra income once she's working full time.

In the meantime, Chan said doing something is better than doing nothing at all. Small steps like tucking an extra $10 a week into the retirement account can over time have a significant impact, he said.

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