October 1, 2003
When One, Plus One, Makes One
Thirty-one-year-old Michael Haney knows what he wants—to be a millionaire by age 60. He has looked at various ratios in meeting his goal to become debt free at age 40 and to amass half a million dollars by age 50. However, Haney’s goals may be a little ambitious. Even with the potential appreciation on a home in Reading, Pennsylvania (appraised market value of $186,000), Haney would need to invest $1,000 a month to reach $570,000 in 20 years and $1.4 million in 30 years (calculations assume an 8% return compounded monthly). At the rate he’s going, investing a little over $250 a month, he can expect to accumulate roughly $352,000 by the time he is ready for retirement.
Haney, an analyst for an industrial battery firm, pulls down an annual gross salary of $40,000, while his wife, Regina, earns $35,000 working as a hair stylist at a local salon. After four years of marriage, the Haneys, who have two sons (Javar Colon, 10, and Christian, 3), have only recently begun to work together to save for their retirement and their sons’ college education. Michael has a 401(k) plan at work worth about $5,000, to which he is contributing 7% of his pay, and Regina has a profit-sharing plan worth about $8,500, to which she kicks in about $80 a month. The couple also set aside $50 biweekly in a 529 college savings plan, valued at about $2,000.
After giving birth to their second child, the Haneys realized they needed extra space. So, they sold their home and had a four-bedroom home built from the ground up. “We enrolled in a credit monitoring program, where we received advice on our personal credit scores, who’s looking at them, and how we could improve our scores,” Michael says. (Mortgage lenders look at credit or FICA scores, which range from 300 to 900 points with anything under 620 considered a poor credit risk). The couple worked hard to save up the down payment, 15%, on the new home. To help with the down payment and pay down some debts, Michael borrowed money from his 401(k) plan. Michael used the proceeds from the sale of his first home to accelerate some debt payments, putting $5,000 toward his student loan and $3,000 toward the car note on his 1996 Lexus.
The Haneys segregate their finances, meaning they have separate checking and savings accounts. Part of the reason is that Regina, 29, has bad memories of the financial challenges during her first marriage. Now the couple is learning to work on setting a reachable goal for their retirement, together, not apart.
The Haneys need to be very conscious of their spending habits in order to meet their10-, 20-, and 30-year financial goals and to expedite the process of accumulating wealth. Otherwise, they will have a cash shortfall come time to retire, cautions Walt Clark, president and CEO, Clark Capital Management in Baltimore. We had Clark consult with the Haneys.
“After discussing the projections he’s using, and, taking the appreciation of