Increasing Earning Power Through Education

The Richardsons have a financial curriculum that includes advanced degrees and greater investments

the Council of Graduate Schools (www.cgsnet.org/ResourcesForStudents/fellowships.htm; 202-223-3791) and the National Association of Student Financial Aid Administrators (www.nasfaa.org; 202-785-0453).

MAINTAIN A CASH RESERVE. The Richardsons currently have $11,400 in a money market account. Most planners like their clients to have three to six months worth of living expenses saved up. The Richardsons’ monthly expenses are relatively low at $2,200, therefore, six months of living expenses would equal $13,200. Creuzot says the couple should pay off the $1,000 credit card debt with half of their cash prize winnings and add the other $1,000 to their reserve.

FOCUS LESS ON DEBT. Creuzot says there is such a thing as being debt-averse to a fault. The Richardsons should employ additional monies toward growth and retirement opportunities instead of accelerated debt reduction. Because they are in a low tax bracket (15% marginal and 10% effective tax rate), every dollar of interest they’re paying is really costing them 90 cents. Creuzot says Rafael made a smart, one-time move by consolidating his $22,600 student loan debt (undergraduate and graduate) to get a low rate of 4%. Since he gets to deduct the interest, he’s paying 3.6% after taxes. Also, the couple recently refinanced from 6.88% to 5.875% on a 30-year fixed mortgage, saving $300 monthly on a home they built for $125,000 that has increased in market value to $275,000.

TAKE TAX CREDIT. Rafael should deduct the interest on his student loan. He can also take advantage of the academic costs he is incurring by using the $2,000 Lifetime Learning Credit available to graduate students beyond the first two years of college or professionals attending classes parttime to improve or upgrade their job skills. IRS Publication 970 and Form 8863 offer complete instructions (www.irs.gov).

READJUST RETIREMENT GOALS. The couple wants to retire early–age 55. But in order to do that, they would need to save $19,000 a year. That’s not plausible at this point nor once Rafael re-enters the workforce, says Creuzot. She recommends that the Richardsons retire at 60. This is more realistic since they are in their early 30s, still pursuing their education, and planning to add children to the mix. If they retire at 60, they would only need to save $11,000 a year.
Currently, Janice is saving $4,000 annually through the retirement system of Alabama. The state plan automatically withholds 5% of an employee’s pay, plus the state matches 6.56%. If Rafael is able to get a university job at $65,000, he will contribute another $7,500 in retirement savings (5% withholding and 6.565% match).

BUY MORE INSURANCE. At the time of death of either spouse, the Richardsons want to have enough money to pay off any debts, including the mortgage, and leave the surviving spouse with a monthly income of $3,000 until age 65. They each currently have $500,000 of term insurance, but really need to have $750,000 in coverage to meet the above objectives.

The Richardsons Financial Snapshot:

HOUSEHOLD INCOME
Gross Income $35,000
ASSETS
Cash Reserve $11,400
IRA (his) 3,100
IRA (hers) 3,000
State Retirement (hers) 3,500
State Retirement (his)
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