Lisa and Beth need to make paying down debt their top priority. But once that's down, they will need to come up with a savings strategy to build up an emergency fund and achieve their short- and medium-term goals including travel and buying their own home. Lisa’s two children are also approaching college age and may need some financial help.
Ideally, Lisa and Beth need to save at least 10-15 percent of their gross income for future goals, beyond what they put aside through retirement plans. At this time, much of these savings are being directed toward debt service and reduction.
Retirement Plan Savings
As with so many couples, Lisa and Beth’s top savings goal is to fund their retirement. Beth wants to retire before she turns 50 and Lisa wants to retire at around the same time, as she is nine years older. A rule of thumb is that Lisa and Beth may need to save up to 20 times their annual expenses for retirement. Financial planners generally recommend that you save at least 20 percent of gross income for retirement and an additional two percent for retirement health care costs. These savings targets are appropriate for Lisa and Beth, as Beth works for a government agency with a very generous defined benefit plan. In fact, in addition to a plan that would allow her to retire by age 50 with a pension equal to 90 percent of her gross income, Beth also has a defined contribution plan with a very generous company match of which we recommend that she take full advantage of. Beth’s employer also offers a supplemental 401(k) plan with no employer match. Given her other generous plans and continual need to pay off debt and build up savings for shorter-term goals, we recommend that she forego this 401(k) and contribute the consequential cash flow to savings and debt reduction.
A budget needs to include an allocation for emergency expenses. Typically, financial planners recommend that families have anywhere from three to 12 months of living expenses set aside in a rainy day fund, depending on their circumstances. Given that both Beth and Lisa are employed, which contributes to their financial stability, their target should be to build a fund with four to six months of living expenses, or about $50,000.