"What If" Scenarios

Investment Strategy

The Silbers want to take a look at their current investment strategy. For the last three years, their average rate of return has under-performed industry averages. The Silber's realize their current asset allocation strategy is too risk averse for a couple in their late 30s -- especially in their retirement accounts. Either working independently or with a financial professional, Rachel and Isaac want to reallocate their portfolio. While this will not dramatically affect their short term taxable savings, it could greatly impact the long-term value of their retirement savings accounts.

Get the Match

Isaac and Rachel realize that the easiest way to for them to grow their retirement accounts is to make sure they get all of the matching dollars available from their employers. This guarantees a 100% return on investment immediately, since for every dollar saved, their employers contribute one additional dollar, up to the contribution maximum.

To test the value of their retirement match, the Silbers increase the pre-tax contributions to their retirement accounts to 3% of their annual salary. While the pre-tax withdrawals will increase the rate at which the Silbers use their taxable savings to pay for childcare and reduce their time to shortfall, the effects on retirement are substantial. By increasing their retirement savings to receive the full match from their employers, the Silbers get more than 18 additional years of retirement income.

No Vacation Home

While Rachel and Isaac dream of owning a second home, they are willing to give up on the dream if it means affording their children's college educations and securing a more stable retirement.

The Silbers soon realize that since the vacation home won't happen until after college, removing it from their plans doesn't significantly affect their ability to afford university tuition. However, eliminating the vacation home would give them more income during retirement, since they would no longer be responsible for the additional mortgage payment that comes with it.

Through a quick comparison, they are amazed to learn that getting the full employer match in their respective retirement accounts will provide them with enough retirement income to be financially secure while also affording a second vacation home. Both Rachel and Isaac are excited to know that their dreams are still within reach and are committed to getting the full match from their employers.

While the combination of the employer matches and a more aggressive investment strategy appears to address their retirement needs, the Silbers still face a shorter-term dilemma. With the arrival of their second child, they will still be draining their taxable savings to pay current expenses in lieu of saving for college. Isaac and Rachel realize that cuts must be made.

Public School

The Silbers realize the simplest solution would be to send their kids to public school. Removing the private school expense shows that once Sam starts kindergarten, the Silbers will no longer need to drain their taxable savings to afford education expenses. The chart also shows that once their second child starts kindergarten, the Silbers will be able to allocate an additional $1,500 to each of the children's college savings accounts and allow the rest of the money to flow into taxable savings. This appears to solve the Silber's shorter-term dilemma, but both Isaac and Rachel are not comfortable with the solution.

Private School / Reduce Expenses / No College

Isaac and Rachel really want to send their kids to private school. Using their "Get the Match" plan as their new base, Rachel suggests they reduce their expenses to account for the money that would be otherwise drained from savings. Isaac suggests they reduce the amount they give to charity. While Rachel is hesitant, she agrees and they reduce their annual commitment from $6,000 to $4,000 a year. They also reduce their clothing budget from $600 to $400 a month. Once Sam start kindergarten, Rachel is going to need a new car to help with carpools. She commits to getting something more practical that will drop her future car payments from $800 to $600 a month. These adjustments have the Silbers back on track. In the very short term they will still be draining money from their taxable savings, but they have stemmed the long-term reductions. In their current plan, Isaac and Rachel have reduced some expenses, but the kids will be able to attend private school. They also will have the vacation home and be able to retire comfortably. However, there is still a shortfall around college.

Home Equity for College

The Silbers, while looking for solutions, notice the value of their home continues to grow to greater than $1 million while the debt owed is less than $225,000, the year Sam begins college. Once the kids graduate, the amount of unallocated income available for spending or savings increases dramatically. Isaac suggests they borrow off the value of their home in order to cover their college shortfall. Adding up the value of their shortfalls during their College Stage, Rachel calculates they will need $100,000 in principal to cover all of the college expenses. She also realizes they will be paying off the home equity loan while the kids are in college. Isaac estimates the payment to be about $900 a month. To leave themselves some room, the Silbers decide to consider borrowing $200,000 on the equity of their home and paying it back within 15 years. That does it. The Silbers' college shortfall is eliminated and without a substantial reduction in available retirement income.

The Big Picture Plan

Rachel and Isaac are happy. They now have a financial plan that helps them achieve all of their goals and dreams. They are going to adjust their 401(k) plans to maximize the matching dollars offered from their employers. They are going to review their investment strategy to get better returns on their investment accounts. They are going to reduce their current expenses to cover the cost of elementary and secondary education expenses for Sam and his soon-to-arrive sibling. The Silbers will do all of this knowing that the equity in their home is available to borrow against to cover college expenses -- and that they can still afford their special place in the Pacific Northwest. Rachel and Isaac are excited.

Now that the Silbers have a plan, they want to ensure their goals and dreams are secure in case anything unfortunate happen to either one, or both of them.

Life Insurance Needs Analysis

Rachel and Isaac run a quick Life Insurance Needs Analysis simulating their financial outlook should either of them die in two years. They quickly understand that both of them are under-insured. Should anything happen to Isaac, Rachel's retirement would be in jeopardy as well as the children's college educations. Should anything happen to Rachel, her lack of insurance would cause drastic and immediate financial turmoil for the family. The Silbers begin to research purchasing additional life insurance.

The Silbers also run Disability Simulations. The results are apparent. Should either Rachel or Isaac become disabled for even a short time, the family would quickly drain their limited taxable savings and suffer immediate financial turmoil. The Silbers see the value of owning disability insurance and decide to investigate the disability benefits available from their employers, as well as other supplemental policies.