$130,000 in employer-sponsored life insurance, only recently did Tonia get $50,000 in coverage.
Though they say they are not where they expected to be at this stage of their lives, Ken says, “We’re people of faith. What’s happened has given us an opportunity to learn.”
Financial Snapshot: Ken and Tonia Chambers Kansas City, MO
The Advice
Kathy Williams, president of Williams Financial Services Group in Oklahoma City, reviewed the Chambers’ finances and came up with a plan to get them back on track:
Hold off on starting a business. Ken will need to face the reality that there is no way he should retire at 60, says Williams. Conventional wisdom is that one should build a nest egg large enough to produce at least 80% of pre-retirement earnings.
“Currently, Ken is putting $530 a month into his 401(k), but $400 is being paid toward a 401(k) loan with a balance of almost $25,000,” says Williams. He has about $177,000 in his 401(k). If Ken retires at age 60, in order to have an after-tax monthly income of $2,500 (80% of pre-retirement earnings), adjusted for 2% inflation, he will need to generate $2,601. If he continues to contribute to his 401(k) at current levels, assuming a 9% annual return, his account would generate monthly income of only about $1,400. In order to make up the shortfall in just two years, Ken would need to make additional contributions of $213,906.
By waiting until age 62 the numbers change in his favor. Adjusted for inflation, his recommended target for after-tax monthly income is $2,706. Assuming the same rate of return, he could draw $1,701 from his 401(k). He’s also eligible for approximately $1,300 in Social Security benefits. These sources, minus estimated taxes of $384, would provide him more than $2,600 each month—much closer to the target of $2,706. To get there, Williams says Ken will need to save at least $60 more each month in his 401(k).
Make investing a priority. When the Chapter 13 repayment is over, those funds should be used to increase Tonia’s retirement savings. She just started with her employer’s plan and has about $2,300 in her account. It will take saving approximately $643 per month at 9% in tax advantaged plans to meet the goal of having 80% of her pre-retirement income by age 65.
Don’t tempt fate. “If Ken or Tonia were to pass away, both would want to provide the other with a yearly income supplement to their current earnings to handle living expenses,” says Williams, “but they’re not set up to do that.” Ken needs at least $355,000 in life insurance coverage to handle debt repayment, education, and provide additional income. Tonia needs an additional $258,000 of life insurance. “Purchasing a 10- to 20-year term policy will meet their needs and their budget,” says Williams.
Study up on scholarships. Williams doesn’t want to see the Chambers delay their goals in order to provide for their son’s college education. She recommends they review scholarships and work study options to lower their financial obligations. Williams suggests