Children Change Everything

The Silbers

Isaac (38) and Rachel (35) Silber were motivated to prepare for retirement. Rachel's parents had always put their children first, including paying for their college educations. Unfortunately, Rachel's father was laid off before retirement and her parents were never able to catch up on their savings. As a result, the Silbers now help support Rachel's parents financially. Isaac and Rachel used to fit the definition of prudent. They saved regularly to their 401(k) plans, always received their employers' matching contributions, and put additional savings in an online investment account.

Then, two years ago, Sam was born. Sam changed everything for Isaac and Rachel, including their financial priorities. In order to afford his childcare, the Silbers stopped making contributions to their 401(k) plans and directed their extra income to saving for Sam's college education. Isaac and Rachel now are expecting their second child early next year.

Isaac is intent on fully funding the children's undergraduate educations, and both he and Rachel would also like the kids go to private elementary and secondary schools. In addition, it has always been a dream of the Silbers to own a vacation home in the Pacific Northwest once the children have completed college.

They understand the challenge ahead in financing their children's educations, while assisting their parents, reaching for their dreams, and saving for a comfortable retirement. They are determined to make smart choices now to lessen their future financial burden.

Goals:

• Private Elementary and Secondary Educations
• Pay for Children's Undergraduate Educations
• Vacation Home in Pacific Northwest
• Retire in Comfort

Key Life Events:

• Birth of Second Child
• Beginning of Elementary School
• Bar and/or Bat Mitzvahs
• College Enrollments
• College Graduations
• Purchase Vacation Home
• Children's Weddings (?)
• Retirement

Earned Income

Isaac is a senior architect at a software development firm, where he makes $122,000 a year. He hopes his career path includes becoming a director and eventually a vice president of development someday, but he likes his current employer and has no plans to switch anytime soon. Isaac is planning on working until 67, but would jump at the chance to retire sooner.

Rachel is a director in the human resources division of a hospital. She earns $71,000 a year. She doesn't see herself working until full retirement age, but is willing to do so for the sake of the children's educations. She too would jump at the chance to retire early.

Taxable Savings

The Silbers have a joint investment account with an online institution for unforeseen expenses and emergencies. The current balance on this account is $57,321. Isaac and Rachel manage this money independently and their returns over the last three years have averaged 7%.

Retirement

Both Isaac's and Rachel's employers offer defined contribution retirement savings plans. Isaac's 401(k) currently has a balance of $90,456. His employer will match 100% of Isaac's contributions up to 3% of his salary. Isaac has the entire balance of his 401(k) account somewhat conservatively invested in mutual funds. These mutual funds have averaged a return of 7% over the last three years. However, Isaac is not currently contributing to his 401(k).

Rachel's situation is very similar. Her hospital offers a 403(b). Rachel's plan also has a dollar for dollar employer match with a match maximum of 3% of compensation. Her current account balance is $45,172. Rachel also has the entire balance of her 403(b) account invested in somewhat conservative mutual funds. These mutual funds have averaged a return of 7% over the last three years. Rachel is not currently contributing to her 403(b).

Both Isaac and Rachel are planning on drawing Social Security at retirement age. However, being almost thirty years away from today's current full benefit age, Isaac is skeptical of the benefits he will receive from Social Security. He wants to make sure that his and Rachel's savings are enough to overcome any potential benefit shortfall.

College

The Silbers have high hopes for their children's college educations and want to assist them in being academically successful. Both Isaac and Rachel want their kids to attend prestigious universities, and are hoping that one of the children will attend school on the East Coast while the other will attend college on the West Coast. These big dreams come with a big price tag. The Silbers' current college of choice for Sam costs $46,436 a year in today's dollars, while the school of choice for their second child currently costs $46,964 a year. They both realize this cost will inflate to be considerably higher by the time their children graduate from high school.

The Silbers have already begun funding Sam's 529 college savings account and will begin doing the same for their second child once it is born. Sam's account has a current balance of $22,691. The Silbers contribute $500 a month to Sam's account and would like to do more. The account has averaged a return of 8% for the last couple of years.

Real Property

The Silbers knew they wanted to start a family and where they wanted to live and raise the kids, so not long after they were married they bought a home in their neighborhood of choice. While they have no plans to sell the house, it has been a good investment. Originally purchased for $525,000, the house was recently appraised at $725,000. The Silbers still owe $425,000 on the mortgage.

After traveling to the Pacific Northwest a few years ago, Rachel and Isaac became enchanted by a small, secluded beach community. They dream of one day owning a small summer home there. The present value of their dream vacation home is $300,000.

Insurance

Once Sam was born, Isaac wanted to make sure the family was taken care of in case something happened to him. He purchased a 20-year term life policy with a $2 million benefit amount. The policy has an annual premium of $1,500.

Taxes

The Silbers recently reviewed their last two years of tax returns and determined that, with all of their deductions, their average federal income tax rate was 18%. There is no income tax in their state of residence. Rachel and Isaac rarely trade their investment account, but when they do, they make sure to hold their investments long enough to pay only capital gains taxes on the income.

Expenses

Isaac's and Rachel's expenses are reasonably in line with their income. They both drive late model cars with monthly payments. Rachel's car is financed with a loan ($800), while Isaac leases ($750). The Silbers have a boat, which they keep at a marina ($350), and they also try to take one or two family vacations as year ($5,000). Other than the monthly mortgage payment on their home ($4,000 including taxes and insurance), their largest expenses are assisting Rachel's parents ($1,000) and paying for Sam's childcare ($700). The Silbers' education expenses will grow even larger once their second child heads to daycare and Sam moves to a private elementary school.

Current Financial Condition

Isaac and Rachel have a lot of competing needs, objectives, and dreams to balance, but with their current income they have a lot of potential solutions. First, some of the challenges:

On their current path, the Silbers will need to start tapping into their taxable savings to afford daycare once their second child is born. The additional daycare expense will cause a savings shortfall, impacting their ability to contribute to the children's college savings accounts. While this might not affect the Silbers' daily lifestyle for several years, it greatly reduces their chances of affording events such as Sam's Bar Mitzvah -- and all but eliminates the possibility of paying for the kids' college educations. Any unforeseen expenses or emergencies could immediately drain the Silbers' available savings and result in instant financial turmoil.

The complete lack of savings for retirement will greatly jeopardize Rachel and Isaac's chances of affording a vacation home or retiring early and leave the Silbers living entirely off Social Security very shortly after retirement. This would certainly mean financial hardship.