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Couple Matches Grand Goals With Smart Saving Strategy
By Michael Kelly
Got a financial question or situation that’s keeping you up at night? Maybe you don’t know where to cut costs to save for that vacation. Perhaps your nest egg just needs a little padding. No matter how big or small your financial goal, we want to hear about it! Tell us about it in 350 words or less, and you could be featured in a future issue of Military Money – and get free advice from a USAA financial expert. Send your e-mail to michael.kelly@usaa.com. Please include a daytime telephone number. But first enjoy the following story of a real military couple, the Mullens.
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Winter 2006-07
Rich and Holly Mullen know how to think big. Rich, a Naval Petty Officer 3rd Class, and Holly, a homemaker, hope to buy a boat and sail around the world when Rich retires. Then they’ll settle down on a nice piece of land.
“Maybe I’ll plant a small vineyard and become a gentleman farmer,” muses Rich.
It’s a grand plan indeed – one that will require a big nest egg to support it.
As a Navy linguist, Rich is used to deciphering foreign concepts. But like many families, the Mullens could use help to translate their finances into a plan for the future.
While they’re carrying a $2,000 balance on their credit card, the Mullens have a few thousand dollars tucked away in checking and savings accounts, and their three vehicles are paid for. In addition, Rich contributes 10 percent of his pay to the Thrift Savings Plan (TSP); his account now has a balance of $6,800. Thanks to a frugal lifestyle, they estimate they can pull together about $400-$500 a month in disposable income.
Both in their 30s, the Mullens want more than just a comfortable retirement. They also have two daughters under the age of two whom they’d like to send to college one day. They’re off to a good start with 529 College Savings Plans in place for both girls. But they confess that they don’t contribute regularly to the accounts.
“We just need some sort of action plan to help us put the right building blocks in place and start working toward those long-term goals,” says Rich.
Fine Tuning Comes First
With the help of Joseph Montanaro, a Certified Financial Planner™ practitioner with USAA Financial Planning Services and a Lieutenant Colonel in the U.S. Army Reserve after six years on active duty, the Mullens can put more wind in their savings sails.
But before offering advice on the Mullens’ long-term retirement and college savings goals, Montanaro recommends addressing a few immediate needs.
Ditch the debt: “The Mullens aren’t overwhelmed with debt, but there’s no reason to keep paying 17 percent interest on a credit card balance when they could pay it off today,” says Montanaro. He recommends that the Mullens close one of their two savings accounts, using $1,200 and some surplus income to knock out the $2,000 Visa bill. This financial move could save them more than $300 in unnecessary interest payments.
Trim the tax refund: Last year, the Mullens got a tax return of about $5,000 – money that could have been earning interest all year instead of lining the IRS coffers. Montanaro advises Rich to increase his exemptions during the next two months to reduce his tax withholding by about $150 every pay period. These withholdings – or exemptions – claimed on your W-4 tell your employer how much tax to withhold from your paycheck. Because Rich received a big refund last year, he had too few.
“To make a change, Rich can visit the Defense Finance and Accounting Service website (www.dfas.mil) and click on ‘MyPay’ to make the adjustments. The IRS website also offers a withholding calculator to help him figure out the right number of exemptions,” Montanaro adds.
With that change, the Mullens now have a total of about $800 a month to put toward savings goals. And they probably can still expect a modest tax refund come next April.
Save for emergencies: “It’s important to have a financial cushion that’s easy to get to, for times when you have to make a major home repair or some other emergency,” says Montanaro. He suggests they start by setting up an automatic deposit of $100 a month to a savings account and increasing that to $300 per month over time.
After putting their current affairs in order, the Mullens can turn their attention to the future.
Ramping Up For Retirement
“When it comes to planning, saving for retirement should come before college savings,” says Montanaro. “There are scholarships and financial aid to help with college, but no one offers loans for retirement.”
While these recommendations aren’t a complete retirement plan, Montanaro offered some basic advice to set the Mullens on the right course.
Respect the Roth: Though Rich has a good thing going with his TSP contributions, Montanaro suggests two additional steps. First, he recommends that Rich allocate his TSP to the Lifecycle 2020 Fund, which will adjust his investments automatically based on his projected retirement date. “It’s an easier way to keep your portfolio in line with your risk tolerance,” says Montanaro.
Next on the to-do list is to open Roth IRAs for both Rich and Holly. A Roth IRA is a retirement savings account that allows the earnings to grow tax-free for qualified distributions – meaning every dollar you save is yours to spend during retirement. Montanaro suggests the Mullens each contribute $100 a month.
“Build the boat” fund: Rich estimates that a three-year sailing trip around the world would cost about $100,000 in today’s costs. Accounting for inflation, the Mullens probably will need to save even more to sail the seas 20 years from now. To give them the best chance of meeting the goal, Montanaro recommends investing in a growth-oriented mutual fund, starting with $100 a month and increasing the contribution whenever possible.
Finance the farm: The Mullens’ dream of settling down in the country actually may start before retirement, with the purchase of land. Assuming the land will cost about $40,000 in 10 years, Montanaro suggests starting with another $100 a month. However, since this goal is nearer-term, he recommends placing these funds in a less risky “balanced” mutual fund.
Collecting Cash For College
Finally, as the Mullens propel their retirement savings forward, they can work toward the goal of assuring their daughters a college education. In-state tuition plus room and board at a public university averages about $12,000 per year, per child, at today’s prices. And, of course, the costs keep getting higher.
To give both girls a “full ride” through school, Montanaro estimates the Mullens will have to save nearly $500 a month. While $100 a month may be a more reasonable contribution for now, there are options to narrow the gap.
“Putting birthday and holiday money toward the college funds helps, and you can increase your contributions as you get raises or bonuses,” says Montanaro. The most important thing, he says, is to put the plan in motion and continue to build on it.
“Whether it’s a pay raise or a promotion, every step-up in the Mullen’s income is an opportunity to increase their savings and the chance to achieve their goals,” Montanaro says.
With a charted course and a light to guide them, the Mullens are one day closer to setting sail.
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Michael Kelly is Executive Director of USAA’s military communications program and a retired Air Force Public Affairs Officer with 25 years of service. Joseph “J.J.” Montanaro is a CERTIFIED FINANCIAL PLANNER™ practitioner with USAA Financial Planning Services, one of the USAA family of companies. USAA is a diversified insurance and financial services organization that has served the military community since 1922. USAA Financial Planning Services refers to financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in
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Roth Or Regular?
The two most common Individual Retirement Accounts (IRAs) are the traditional and the Roth. What’s the difference?
A traditional IRA allows you to contribute up to $4,000 a year, and the contributions are tax deductible. This tax advantage increases your income now, but you have to pay taxes on the money when you take it out upon retirement.
A Roth IRA works the other way around. The contributions are not tax deductible, but you don’t pay any taxes when you withdraw the money after age 59 1/2.
Which is better? It depends on your specific goals and how your other investments are set up. Check out the “IRA Analyzer” at www.usaa.com to compare the two, or ask a financial adviser for help.
