They say trouble comes in threes. That was certainly true for Ken and Tonia Chambers. The tragedy began with the unexpected death of their 18-year-old daughter, Rachelle. The dissolution of the law firm where Tonia worked as a paralegal and the necessity to file for Chapter 13 bankruptcy followed.
It’s been a little more than three years and the Kansas City, Missouri, couple is finally starting to breathe again. “You don’t expect your children to go before you do,” says Tonia, with a numbness that may never go away.
Rachelle had gone to visit an older sister at college in Minnesota. Along with friends, they headed to Chicago to have some fun but met with danger instead. “Someone attacked their group for no reason and my daughter was shot in the neck and died,” she explains.
The grief and shock still stain their hearts, and the financial damage remains as well. There was no life insurance policy on Rachelle, so the Chambers had to handle the expenses themselves. All told, they ended up with $15,000 in bills. They drained $10,000 of their savings and borrowed $5,000 from family and friends.
“Her death was the beginning of a downward slide,” says Tonia. Soon thereafter, the law firm Tonia worked for reduced her salary by more than $10,000 as it was downsizing and reorganizing. Ultimately the firm dissolved. “Making so much less really hurt us at a time when we were trying to rebuild our savings,” she says. Of their four children, the youngest, 17-year-old Patrick, is still at home.
Indeed, by October 2005, the financial damage had been done and the Chambers elected to file for Chapter 13 bankruptcy—committing to pay back $18,000 at $500 a month for three years. A year into the bankruptcy Tonia found another full-time position, and the Chambers now have a household income of $110,000.
“Before our daughter’s death we had substantial debt,” says Tonia, 46 . “We would take weeklong vacations and charge everything.” Says Ken, a staff attorney for a law firm that provides legal services to union employees, “We are educated, but we weren’t educated in the financial arena; we didn’t understand how money works.”
The family has cut its spending. They now take shorter vacations and spend less at the grocery store. And credit cards? Those days are over. Ken says one smart thing they did was take advantage of Chapter 13, a form of bankruptcy that allows them to pay overdue bills to the court, yet keep their house. “With Chapter 7 you get out of debt, but you lose your house, and my 401(k) could have been in jeopardy.”
And safeguarding those retirement assets—combined at more than $179,000—is key. At 58, Ken would like to start his own business, but can live with waiting up to two years. His original goal was to retire from his current job when he turned 60 with at least $300,000 and start a legal consulting business.
For now, the Chambers have begun to put $200 monthly toward an emergency fund. While Ken has $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 they explore some of her favorite Websites targeted to African Americans, such as the Gates Millennium Scholars, www.gmsp.org; The Scholarship Gateway, www.blackexcel.org/link4.htm; and The Ron Brown Scholar Program, www.ronbrown.org.
HOUSEHOLD INCOME
| Gross Income | $110,000 |
| ASSETS | Â |
| Market Value of Home | $200,000 |
| 401(k) Accounts | 179,600 |
| Stock | 250 |
| Checking Account | 1,700 |
| Savings Account | 150 |
| Money Market Account | 750 |
| Plymouth Grand Voyager* | 3,370 |
| Total | $385,820 |
| LIABILITIES | Â |
| Mortgage | $189,000 |
| 401 (k) Loan | 25,000 |
| Bankruptcy Payments | 6,000 |
| Total | $220,000 |
| NET WORTH | $165,820 |
*ACCORDING TO KELLEY BLUE BOOK