Decisions, Decisions
Fred and Connie Burkholder may be newlyweds, but they’re not going to be living on love.
It’s a second marriage for both, and the couple are sorting out desires and previous obligations. They want to buy a home, but they have a lot of debt. Connie wants a child, but Fred, who already has four children, isn’t so sure. They like to enjoy themselves but know they need to save for retirement too.
They have some choices to make.
Connie, 41, was divorced 10 years ago. The former probation officer knew she liked counseling people, and she returned to school with the idea of earning the credentials to become a therapist. She earned two master’s degrees and a couple of years ago began a private practice as a marriage and family counselor. Now she’s completing a doctorate in sociology at USC.
She’s convinced that therapy is her calling, but it’s one that’s taken a lot of money to pursue.
In eight years of study at USC, she has racked up more than $68,000 in student loans. Payment on those has been deferred, but Connie will have to start meeting that obligation six months after she completes the requirements for the advanced degree, probably in two years. Because she’s been in school so long, Connie’s been unable to save as much as she would like to buy a home, afford a baby or plan for retirement.
Fred, 52, a Vietnam veteran who has a background in electrical engineering, works as a regional marketing specialist for a European conglomerate. He’s earned a comfortable living for decades, but he’s also been supporting four children, now ages 17 through 25, from his previous marriage, so he’s never had much extra cash. He also has a $16,000 balance on a student loan he took out this year for his eldest daughter. However, Fred has accumulated about $50,000 in his company’s pension plan and more than $36,000 in his tax-deferred 401(k) retirement plan.
The old saw has it that money is one of the two leading causes of marital discord (sex being the other). That’s something Fred and Connie were determined to avoid. Before they took their vows, they had a frank talk about finances.
“We both knew where we were with our debts and obligations,” Fred explained. They agreed that each would maintain individual responsibility for the bills and obligations incurred before the marriage. Now they are trying to establish a plan to reach their common goals and build a foundation for a more prosperous future.
Theirs is a particularly challenging situation because they must grapple with financial concerns typical of the middle-aged as well as some usually faced by younger couples.
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The matters of whether to have a child and whether they will be able to afford to buy a home soon concern them most. In their case, a baby would be an especially costly proposition--Mother Nature will have to be assisted with medical procedures their insurance won’t cover. The fact that they have such a large debt load is making every choice that much more difficult.
But first things first, said fee-only financial planner Jane V. King of Wellesley, Mass., who specializes in the financial complexities of second marriages.
Priority No. 1 for any blended family is to establish wills and trusts, she told the couple. That way, if Fred were to die tomorrow, there would be no confusion as to the beneficiaries of his life insurance and retirement packages.
Connie has written a will, but Fred has not. “I haven’t even thought it through,” he admitted.
“When you have competing priorities [in estate planning], it’s important to lay things out in writing,” King said. Once the couple have decided how they want their assets distributed, she said, they may want to consult with an estate-planning lawyer, which should cost them between $600 and $1,000.
Once the estate-planning issues have been addressed, King said, Fred should realign his 401(k) investments, now all in low-risk income funds, so his savings will work harder for him.
“I would urge Fred not to be so conservative,” King said, since he has 15 to 20 years before he will retire. “He’s too young and there’s too much time for him to give up growth on those assets. With that amount of time [before he retires], the risk of losing that money is slim.”
She recommended that he put the $36,587 now in his 401(k), plus the $7,200 he puts into it annually, into a more aggressive and diversified mix of mutual funds offering the likelihood of higher returns.
Her choices from what’s available through his company’s plan: one-third into Vanguard Wellington (five-year average annual return: 16.4%), a balanced fund that invests in undervalued large-company stocks, government securities and high-grade corporate bonds; one-third into Fidelity Spartan U.S. Equity Index (20.3%; known as U.S. Equity Index Portfolio before April), a large-cap fund that attempts to replicate the performance of the Standard & Poor’s 500-stock index; and one-third into T. Rowe Price International Stock (13.8% ), a moderate-risk fund that invests in companies based in other countries and that boasts of a high performance rating from fund tracker Morningstar Inc.
What little Connie has been able to set aside for retirement is also invested conservatively. She contributed $6,000 in individual retirement accounts invested in American Funds Group holdings a dozen years ago. That investment is now worth about $20,000.
If King were directing Connie’s investment choices today, she said, she would discourage her from selecting funds that impose sales charges, or loads, so that 100% of her money would be working for her. But since Connie’s existing funds have performed well, King saw no reason to make changes.
Connie has $7,443 in American Mutual (five-year average annual return: 16.9%), a growth-and-income fund that has had only one losing year in the last decade, and $3,688 in Income Fund of America (14.9%), another low-risk vehicle that maintains at least 65% of its assets in income-producing securities. Two of her choices have involved more risk, and they’ve brought good returns too: There’s $4,062 in New Economy (18.9%), which invests in mid-cap companies; and $5,487 in Amcap (17%), which invests in a blend of large- and mid-cap companies.
King encouraged Fred and Connie to review their investments at least once a year to make sure the choices still make sense.
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Before the Burkholders can contemplate homeownership, King said, they must pay down a big part of their debt. It currently totals $84,400, or 65% of their worth. “That’s too much to carry,” King told them. “Having to service that debt limits your options.”
But how to do it? King recommended that the couple see where they might be able to cut some of their expenses and, if possible, start accelerating their payments. Once they’ve cut their debt in half, they can think about saving for a house, King said. Not before.
“That would be the bell I’d have to hear ringing to say, ‘Now we can look at real estate prices and mortgage interest rates,’ ” she said. “But to do it now, before they clean up their debt load, it’s kind of foolhardy.”
It will take discipline. “You must try to manage yourselves like a business,” she told them. “Take a look at what it takes to drop the debt and then examine the variable expenses. Say, ‘What can we do together to reduce our debt?’ ”
Fred and Connie say they don’t spend frivolously but admit that as a busy two-career couple, they eat in restaurants frequently, a pricey habit.
“When you have two people working, it’s hard not to,” said Connie. She’s not sure she and Fred would be willing to cut back further, though, saying they’d feel deprived if they cut out all their frills.
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Then there’s the matter of whether to have a baby.
“Clearly, there are some things more important than money, and a child is one of them,” King acknowledged.
At 41 years old, Connie must make up her mind soon. She’s mindful of the serious emotional and financial responsibility a baby would mean, and of the fact that Fred, who has already had the experience of rearing children, doesn’t share her yearning. Fred has also made it clear that he won’t compromise his retirement savings to afford a baby. Connie agrees that’s reasonable.
“I’ve already raised four kids, and if it was up to me, I’d say no,” he said.
Fred has been looking forward to the end of his formal financial obligations to his children.
He pays $250 a month in child support for his daughter Dana, 17, but that will end next year when she heads to the University of Arizona on an athletic scholarship.
But Fred likes being active in his children’s lives, and that includes helping them out often with things such as apartment security deposits, automobile tires, school books and the like.
Fred also likes to splurge on them sometimes. Not long ago, for example, he popped for a $1,000 family dinner to celebrate his eldest son’s marriage.
The couple estimate he spends about $200 a month on extras for his kids. Is he willing to sacrifice that for a new baby? That remains to be seen.
Fred has left the final decision about starting a new family with Connie.
“The biggest question in my mind is, ‘Can I afford to do this?’ ” she says.
If Connie decides to proceed, she will have to undergo artificial insemination, because Fred has had a vasectomy.
According to Dr. Andrea Stein, a reproductive endocrinologist with California Fertility Associates in Santa Monica, the doctor’s office-visit costs alone can range from $500 to $1,500 per cycle, and it can take as many as six tries. There is also the matter of risk--the chance of success for a woman of Connie’s age is 40% to 50%.
Where does that leave her? If Connie does give birth, she’ll have to bear most of the financial burden.
Whatever happens, she won’t be scaling back her work hours. She’s committed to building her practice. And she loves her work. But even if she wanted to quit for a while, she couldn’t--she will need every dollar to pay her debts and meet living expenses. And without relatives nearby to help, she’d have to pay for child care, which can run anywhere from $400 to $1,000 a month.
Connie is also apprehensive about bringing a newborn into the couple’s one-bedroom apartment in Long Beach’s Belmont Shore district, but she knows it could be years before the couple can save enough to buy a home.
The way King sees it, life presents a series of choices. Examine your top goals, she says, and if satisfying all of them isn’t feasible, you will have to set priorities.
Said King: “You look at it and say: ‘What has to give? What do I want more--a home? A baby? Early retirement?’ Maybe it means you have to give up two or three of your goals in order to accomplish the ones that mean the most to you.”
Connie and Fred have some serious soul-searching ahead.
Whatever she decides about a child, Connie knows this: She needs to make more money. Last year her practice brought her $33,000. That should rise as she builds her client base, but she is well aware that in this era of managed care and caps on insurance reimbursements for psychological services, few solo practitioners will be getting rich.
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Last week, Connie accepted a full-time job as a social worker that will give her a stable $31,000 annual salary, plus health insurance and disability benefits and a much-needed retirement plan. She will continue to see patients privately as well.
King thinks the move makes sense.
“Right now, she’s got to build some stability in her life, especially if she decides she wants the child,” King said.
Clearly, the couple are at a crossroads.
But once they identify their priorities and make the commitment to take the steps to achieve their goals, they will be able to attain them, the planner reassured them.
“People with fewer assets have done it,” she said.
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Jennifer Pendleton is a regular contributor to The Times. To participate in Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
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This Week’s Make-Over
* Investors: Fred Burkholder, 52, and Connie Burkholder, 41
* Occupations: Fred is an electrical engineer; Connie is a marriage and family counselor.
* Combined gross annual income: About $100,000
* Financial goals: Pay off student loans. Save for retirement, for a home and perhaps for a child.
Current Portfolio
* Fred: $50,000 in a company pension and $36,587 in a 401(k) savings plan invested in income funds; $16,000 in student loan debt
* Connie: $20,000 in individual retirement accounts in Income Fund of America, American Mutual, Amcap and New Economy, all part of the American Funds Group; $68,400 in student loan debt
* Both: $5,000 in cash savings
Recommendations
* Address estate-planning matters such as wills and trusts.
* Put Fred’s 401(k) savings and future contributions to his plan into a more aggressive and diversified mix of mutual funds. Connie’s IRA investments can stay where they are.
* Reduce debt as much as possible as soon as possible; look for ways to cut expenses.
Recommended Mutual Fund Purchases
* Vanguard Wellington: (800) 992-8845
* Fidelity Spartan U.S. Equity Index: (800) 544-3902
* T. Rowe Price International Stock: (800) 638-5660
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Meet the Planner
Jane V. King is a fee-only certified financial planner and money manager based in Wellesley, Mass. She specializes in the financial complexities of second marriages. King is a board member of the Women’s Economic Roundtable, a New York-based group that organizes public forums with major policymakers on economic issues.
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