1) Insurance & Risk Management
When there are immediate issues, it can be difficult to be concerned about the non-urgent, but important ones. Sara is thoughtful to recognize that she does not have a grasp on the risks that may not be covered by her work provided benefits.
Disability Insurance
By far the largest risk to Sara’s immediate situation is her ability to earn an income. The odds of someone age 45 having a disability of 90 days or longer are greater than 1/3.1
Sara’s employer provides generous insurance coverage for disabilities. After using all earned sick and vacation time, she would receive 60 percent of her income until age 67.
While any addition to the budget at this point is tough to consider, any coverage Sara can have while the children are young is a good thing. While a more ideal policy with inflation coverage and guaranteed renewable and non-cancelable riders would cost more than $100 per month, a more basic policy with a residual disability rider was quoted at about $30 per month to bring up income coverage by another $1,000 per month. In Sara’s case, any coverage is world’s better than no coverage.
Life Insurance
Sara has $247,000 of life insurance, which appears to be an appropriate amount to cover expenses for the children until age 18. However, Sara may consider carrying another $200,000 of term life insurance for the next five years to cover the living expenses of the children as they themselves get started.
Renters Insurance
Carrying renters insurance is important — not just from the standpoint of insuring your items, but perhaps more importantly for liability purposes. Sara could be held liable for any injuries that happen on her property. Thus, she should try to fit renters insurance into the budget
Auto Insurance
One of the ways Sara might be able to decrease her expenses is by checking if her auto deductibles on comprehensive and collision are at least $500 or $1,000 — especially considering her costs may rise with her car purchase.
Estate Planning
Currently, Sara does not have a will or other legal documents to provide her wishes for managing her affairs should anything happen to her. She should speak to a local attorney regarding these items, which include a discussion about her wishes for a guardian for her children, a living will and durable power of attorney.
2) Retirement & Career
Sara knows she’s behind the eight ball on retirement and needs to play catch-up. Starting over can do that. The good news is, since Sara is young, she has options.
While Sara’s goal of retiring at 62 would be difficult, if she extends employment to age 67, with Social Security and a small pension from a previous employer, the situation would not be quite as bleak.
Sara may need to count on her portfolio for possibly $25,000 or more annually to meet expenses for her current lifestyle. Reaching this goal by age 67 would require approximately an additional $10,000 annually in savings on top of the current savings (including employer match) placed into growth investments.
Since the budget is currently stretched, and her more immediate needs are to establish and maintain a cash reserve, we recognized this is a long-term target.
An obstacle in achieving financial independence for many is the lure of increasing standard of living in the face of additional spendable income. At this point in her career, Sara needs to save any increases in income or reduction in expenses, as opposed to living a grander lifestyle. Also, we discussed the savings opportunities and Sara’s long-term goals related to her career.
Retirement Savings Plan
Sara is saving just over five percent in her employer’s 401(k) plan. With a one percent discretionary contribution, and a four percent match on Sara’s five percent contribution, the total amount added to the plan on her behalf is equal to 10 percent of her salary of $46,500. She has made a smart first step in maximizing the matching funds.
Sara will also investigate the availability of a contributory Roth option under her 401(k) employer plan. With her current deductions and credits, she would pay little in taxes on her contributions to the Roth account. Also, she is not greatly benefiting by deferring the taxes under the traditional 401(k) plan. Since tax planning will change over time as her situation changes, this part of the plan should be monitored for changes in: expected income, deductible expenses, as well as new legislation. Being the head of a four-child household, Sara is on the border with many credits that may benefit her. While the Roth 401(k) seems like the right place to save today, there may be better options in the future.
Investments and Roth Individual Retirement Account (Roth IRA)
Sara is not adverse to risk in investing. During our discussions, we spoke about the importance of diversification over multiple asset classes, and how investing outside of her employer retirement plan can offer additional diversification benefits. Thus, she should invest with a weighting toward growth oriented mutual funds.
With the present circumstance, Sara may consider a Roth IRA once her emergency savings goal has been reached. The benefits of the Roth IRA are the ability to invest while complementing her other savings, as well as the fact that Roth IRA withdrawals are not subject to tax in retirement.
Career Goal Setting
There are two events that should help Sara in reaching her annual savings goal:
- The children becoming adults.
- Continuing to gain experience, advancing, and exploring a full-time or part-time position in fields she is passionate about.
Both of the above events will accelerate Sara’s investment plan, as well as her ability to keep debt under control.
In our conversations, Sara revealed that she is not currently working in her ideal field, nor making what she could be if she had a less constrained life. Perhaps her greatest assets are her dedication and work ethic. Even though her current position is not something she enjoys, Sara’s attitude is to be the best employee she can be.
I encouraged Sara to not only think about landing her dream job and retirement, but also what may be next in her life. Sara said that this could be sharing her passion in the field of leadership with others as a part-time instructor.
Part of Sara’s money makeover homework will be to continue to plan next steps, or small actions, she can do today to place her in a position to realize her goals. She has already found a training class she is excited about starting.
Career and retirement goals go hand in hand. Realizing there may be other options to continue earning some amount of money in retirement will lessen her portfolio needs at retirement. Opportunities in retirement can eliminate or reduce the amount of withdrawals needed from savings and investments, allowing those accounts to provide further into the future.
1 1985 Exposure Draft Report to The Society of Actuaries
