Couple get plan to bounce back from job layoff, save for retirement

Architect Cary Westerbeck is eager to draw up some plans for his family's future. At 40, he's rebounding after being laid off in 2009 by the firm he'd worked with for five years.

Unable to find a new job, Cary launched his own business, which has been steadily increasing as he builds a client base and the economy recovers.

Though Cary said losing his job was ultimately freeing, he and his wife, Julie Westerbeck, had to take a hard look at how they were going to cover their estimated $6,500 in monthly expenses.

"I make one-half to three-quarters of what I used to," Cary wrote in an online survey to participate in a free financial makeover. "Yet we have retirements to fund and two kids' college educations to fund."

That $6,500 figure includes the $1,600 monthly mortgage on their North King County home, Cary's student-loan payment, living expenses and payments on about $4,600 in credit-card debt. The Westerbecks also pay $212 a month to Washington's Guaranteed Education Tuition (GET) program to purchase units worth three years of in-state college tuition for their 7-year-old daughter Leah. They'll pay this amount until Leah turns 18.

Fortunately, as a teacher with 18 years of experience, a master's degree and a special certificate, Julie earns near the top of her district's pay scale, about $75,000 a year.

But since the birth of their second daughter last summer, she's been working 80 percent of a full-time job at her school, plus they have additional child-care expenses. Cary says he cut some insurance coverage, stopped contributing to his IRA and put off fixing the roof of their house while they reduced household expenses wherever they could.

"We weren't really 'budget people' until we were forced to be," Julie said.

Julie's contributions to her retirement plan at work are mandatory, and her balance is just over $100,000, but Cary's IRAs contain just $20,000 and he's only recently been able to resume putting $100 a month into one.

Still, he has the niggling sense that they are maintaining what they have, but not really getting ahead. Soon, they hope to be able to start purchasing GET credits for Lana, the baby.

Cary and Julie both said they would appreciate a blueprint for their finances to make sure they are being responsible with their money. Cary also says he's at a loss to know how much life or disability insurance they really need.

"We aren't doing badly, nor are we thriving," Cary wrote. "We probably have enough to get by if we do things right, but we don't always know what that is."

Like an architect, Mercer Island certified financial planner Betty Hedrick meets with clients, listens to their priorities and creates a framework for them. Hedrick, a member of the Financial Planning Association's Puget Sound chapter, likes to say it's important that people live their lives fully today while still paying for yesterday and protecting tomorrow.

Part of that protection includes building what Hedrick calls a contingency fund, or liquid cash the Westerbecks can easily access for emergencies or unexpected expenses like a broken pipe.

In the Westerbecks' situation, Hedrick recommended three months of current spending, or about $21,000, plus another $10,000 in a separate, long-term savings account. Currently, the Westerbecks have about $7,000, with an additional $3,000 in a vacation fund and a smaller amount in a checking account.

Though the Westerbecks wondered if they should pay off their credit-card balances first, Hedrick said it more important to build up the buffer. So important, she also advised Cary to temporarily stop putting $100 a month in his IRA and to postpone opening Lana's GET account.

"The risk of needing access before age 59.5 outweighs the value of the tax savings, up to a certain point," Hedrick wrote in her recommendations. "We can earmark investments for retirement without putting them into IRA accounts."

And even though the Westerbecks stopped using the credit cards more than a year ago, Hedrick suggested they use one every so often, paying the charge in full on the next statement, to avoid becoming marked as inactive users and nontarget customers by the credit-card companies.

After they build up their savings, however, Hedrick advised the couple to pay off the highest interest-rate card first.

As for the college savings, Hedrick reminded them that their retirement is still more important.

"The girls will be able to get an education in some way at some time, but retirement income is what ensures shelter and food," Hedrick wrote, adding that they have enough income to save for both, assuming Cary's business earnings continue to grow at 3 percent annually from 2010's $50,000 and Julie's salary increases by 2.5 percent annually.

And as with retirement, some of the college savings may need to be earmarked funds within their own accounts rather than tax-qualified plans, Hedrick wrote. Another type of account Hedrick would like to see the Westerbecks open after they have the $31,000 saved is a nonretirement investment account.

Though Hedrick found that the Westerbecks' spending was within the range of families with similar demographics, she suggested they find a way to cut another $100 a month to add to what they are already automatically saving outside of Julie's retirement plan at work (a $96 payroll deduction to savings and the $100 Cary was putting in his Roth IRA).

They could do this by making a behavior rule for themselves, eating out only a certain number of times per week, for example, but Hedrick cautioned the couple to set rules they both like and agree on 100 percent.

"Life happens, so don't beat yourself up," she advised.

Hedrick ran projections for the Westerbecks' retirement and provided them with cash-flow tables for each year of their retirement based on certain rates of return and inflation.

"It was important to me to understand how much we might need to retire — to reverse engineer that and understand what it takes to get there," Cary said. Hedrick's projections confirmed Cary's belief that Julie was on track, and that he needs to be putting more away once their cash cushion is in place.

From all indications, though, the Westerbecks have weathered the job-loss storm in decent shape. "The bottom line is that you are doing a good job," Hedrick wrote to the Westerbecks.

"The only area of significant deficiency is life and disability insurance. Everything else is just a matter of fine-tuning."

To help calculate how much life insurance Cary and Julie need, Hedrick added up the amount needed to pay off the credit cards and student loans, replace the deceased spouse's earnings, add another three months to the contingency fund and cover the cost of the girls' college fund.

To do that, Julie needs an additional $568,000 in coverage on top of the $75,000 she currently has through work, and Cary needs $277,000. Hedrick suggested 20-year term policies.

Cary also needs long-term disability insurance, which he has already found through a group plan and plans to purchase. Julie has disability coverage through work. Since Cary spends time on construction sites, Hedrick also recommended he buy Workman's Compensation coverage through the state, another task Cary has already checked off the list.

In all, Cary said he and Julie are gratified by the clarity they received from Hedrick's financial plan. Though he said he still doesn't know where his next project is coming from, assuming they can both stay gainfully employed, they now have a framework to follow.

"I just feel so much more at peace about the future," Cary said. "I feel like there's a path that's clear, and while it will be work and it will take time, we understand what to do now."