A Little Less Now = A Lot More Later
The Harrisons
It's been a while since John (50) and Helen Harrison (51) thought about their long-term finances or retirement, but their son Josh's plans to study abroad and daughter Jennifer's (25) recent wedding announcement have them worried. The Harrison's want to help fund their children's once-in-a-lifetime plans, but the projected costs could drain their savings, set back their dream of purchasing an RV, and leave them no money for personal emergencies. All of this has John thinking a lot more about retirement.
Goals:
- Subsidize Josh's studies abroad
- Help cover the costs of Jennifer's wedding
- Purchase RV
- Retire at age 65
- Enjoy the road ahead
Key Life Events:
- Josh's semester abroad
- Jennifer's wedding
- RV purchase
- Retirement
Employment Income
John works as a Project Manager for a state government agency, where he makes $57,250 a year. During tax season, he also moonlights as a tax advisor, which earns him an additional $8,000 a year. John plans to stay with his current agency until his retirement at age 65. He will stop moonlighting as soon as the Harrisons have enough money to purchase their RV.
Helen went back to work full time as a nurse when Josh graduated from high school. She earns $55,000 a year and plans to retire at age 66, the same year as John.
Taxable Savings
The Harrison's have a standard joint savings account as their rainy day fund. The current balance is $31,000. They try to put $1000 a year into this account.
Retirement
John's state pension plan provides 2.3% per year multiplied by the number of years of service of the average of John's highest three years of salary. John tries to contribute $1,000 a year to his optional 403(b) retirement plan. The current balance in this account is $22,000.
Helen's hospital also provides a pension plan, which pays 2% multiplied by the number of years of service of the average of Helen's highest two years of salary.
Both John and Helen intend to draw Social Security benefits immediately upon retirement.
- 403(b) (John) $22,000
- Pension (John) $38,987
- Pension (Helen) $29,029
- Social Security (John) $25,190
- Social Security (Helen) $26,012
Real Property
Six years ago, the Harrison's used a home equity loan to refinance their mortgage and applied the proceeds to help pay for Jennifer and John's college tuition and remodel the kitchen. The house is currently valued at $301,000 with a mortgage balance of $72,000. The monthly mortgage payment, including expenses, is $1,740.
Once the home mortgage has been paid off, John wants to buy a Class A recreational vehicle which costs $85,000. To afford this purchase, John plans to finance a majority of the cost of the RV.
- Home (John, Helen) $301,000
- RV (John, Helen) $85,000
Debt
- Mortgage (John, Helen) $72,000
- RV (John, Helen) $85,000
Taxes
The Harrison's reviewed their last two years of tax returns and determined their average federal tax rate to be 17%. John and Helen also pay 3% of their gross income in state income taxes.
Expenses
John and Helen are active in the community and donate generously to numerous charitable organizations. They enjoy a busy social life attending cultural events, concerts, and dining out. The Harrisons also love to travel and take two or three vacations a year.
Current Financial Condition
The Harrisons have left themselves little room for error. Helping Josh with his living expenses while he studies abroad will significantly reduce their personal savings; Jennifer's wedding will completely exhaust the remainder. Purchasing an RV will create a financial shortfall and force pre-retirement withdrawals from qualified accounts. This will leave the Harrison's living on their pension and Social Security income alone during retirement -- and without any sort of safety net for unforeseen emergencies.
