Taylor Remade : How Boomers Can Avoid Going Bust

Like many Southern Californians, Warren Taylor doesn’t understand why he never has any money.

The 41-year-old post-production supervisor says his paychecks are spent before he gets them. He can’t imagine taking his family on a Hawaiian vacation, much less begin to put money away for retirement or start a college fund for his two children, Brandon, 10, and Lauren, 5.

Although Taylor and his wife Lorie, 34, a self-employed hairdresser, together make about $60,000 a year, they have virtually nothing left over at the end of every month. Even worse, Taylor, who helps do post-production for many of the “Peanuts” animation ventures, said his job security in the entertainment industry is always uncertain.

“I always worry that tomorrow will be the last day I have a particular job,” Taylor said. “I live paycheck to paycheck, so if the paycheck stops, I’m already in the hole.”

As a result, Taylor keeps his Tujunga family on a tight budget. They cut coupons, eat out only once a week and see movies just twice a month, sticking to cut-rate matinees. The last trip they took was a visit to Oregon to see relatives last Christmas. The family drove there to save money.

They have managed to save $13,500 in a low-yielding bank savings account. Taylor’s employer has put aside $10,400 for him in a motion picture industry pension retirement fund. The family has only $500 in debt.

Still, what they are doing is not enough. If they don’t begin saving more, they will be penniless when it comes time to retire. But the Taylors’ estimated $3,000 in monthly take-home pay gets eaten up so quickly that they can hardly put aside anything for the future. Here’s where it goes:

* $900 each month in mortgage payments on a $150,000 two-bedroom house on which they still owe $110,000.

* $700 a month on private school for their two children.

* $300 a month on gas for long commutes and trips with the children to soccer practices or gymnastics classes on the weekends.

* $800 a month on groceries--”My son eats like a horse,” Taylor said.

* $165 a month on insurance for two cars. They have no auto loan payments, however.

* Along with expected expenses, it’s the unexpected things that hurt the Taylors. New soccer pads for Brandon, a gymnastics outfit for Lauren, costly car repairs or office birthday gifts siphon their remaining earnings.

The Taylors want to have more savings and learn how to control their spending. They may want a new home, as the two children are getting too old to share a room in the family’s two-bedroom house. Also, Warren has no will or life insurance and his wife has no retirement savings account.

Taylor is trying to do his best. But he needs to do more, said certified financial planner Judith Martindale of San Luis Obispo.

She estimates that most Southern Californians are just like the Taylors, irresponsibly living paycheck to paycheck. She said the Taylors’ situation, albeit frightening, is similar to that of many of her clients in their 40s who still haven’t learned how to take responsibility for their money.

“Living within your means is living with integrity,” said Martindale, the author of “52 Simple Ways to Manage Your Money.” “Living beyond our means is not living as an adult.”

That’s all well and good, Taylor said, but managing finances for a Southern California family these days is especially tough.

“It’s very scary. So many people are falling off the treadmill--people smarter than I am. I didn’t realize this would be so hard,” he said.

It’s not as hard as Taylor thinks, Martindale said.

*

First and foremost, Taylor needs to be more disciplined about money--begin to monitor more closely his and his wife’s spending patterns. Most of all, he needs to learn to pay himself and his family first--by saving money for the future.

Taylor should start by religiously putting aside $500 a month, or 10% of the couple’s income, toward retirement and college for the children. Martindale also wants to see him boost the $13,500 reserve he keeps in a savings account to about $17,000, or almost 30% of the couple’s combined salary, because his job is so unstable and his wife is self-employed.

Even with that, the Taylors will be way behind where they need to be.

Ideally, they should be putting aside $11,000 a year just for retirement, an unrealistic amount for this family, Martindale said. That number is calculated on their current situation and assumes 3% inflation, Social Security benefits, a 10% return on investments and Warren living until 85 and Lorie until 87.

Also ideally, the family should start saving an additional $450 a month now for college. Those are low figures based on the children’s going to a junior college for two years and a state school for two years, Martindale said.

For the Taylors, numbers like these are mind-numbing, as they are for many of the clients Martindale sees. For many Southern Californians, knowing the amount they need to save for retirement induces a state of paralysis--the task appears so daunting that they put off even starting. That’s why Martindale advises the 10% figure to start for the Taylors--it would be workable for the family and get them into action, the most important thing.

In order for the family to take that step, Martindale advises Taylor to take advantage of the access he has to Quicken, the personal computer finance program from Intuit that enables people to keep track of their finances, pay bills and build a financial program. She suggests he create a “spending plan” for his family rather than a budget, and stick to it.

His wife should also scrutinize her business, possibly with the help of a tax preparation book, to see if there are ways she could take more tax deductions available to small businesses.

Martindale advises that Lorie consider another job with more pay now that the children are getting older, but Lorie likes being available if the kids need her.

Though Martindale did not advise the Taylors to try to live without one of their cars, either the 1994 Dodge Caravan or the 1987 Mitsubishi Montero, she said they could try to live without the extracurricular activities for the children because they are in private school. But the family is committed to those activities for now.

Although the couple could stop spending $700 a month to send their children to private school, that’s just not possible, Taylor said. The high-quality schooling is well worth the expense, he said.

“I’m afraid it would be like sending Bambi into the forest to send my kids to public school now,” Taylor said.

*

Still, to get where they need to be, the Taylors are going to have to make some big sacrifices, Martindale said.

“This isn’t easy. There are good reasons for everything that they are doing,” she said. “But they aren’t living in reality. If they keep going the way they are going, they won’t have anything.”

Once he has enough cash savings in reserve, Martindale said, Taylor should begin building a retirement fund by taking $3,000 and putting it into a no-load stock mutual fund such as the Vanguard Index Trust 500 (five-year average annual return: 15.1%), which invests in the blue-chip stocks of the Standard & Poor’s 500-stock index. It’s a good fund to use as a foundation for a portfolio and has a low expense ratio, Martindale said.

She said other such stock index funds, such as Schwab 1,000 (five-year average return: 14.9%), might also be good for the same reasons, and can be opened with as little as $1,000.

“I know it hurts seeing the market flying and you’re not getting anything now,” Martindale said, “but first you need to build a strong foundation of savings.”

Once he begins investing his money for retirement, Taylor should adopt a fairly conservative strategy until he builds more of a foundation, Martindale said.

As part of getting his finances under control, Taylor needs to start thinking long-term. Like many boomers, he hasn’t planned financially for his death. He should move to quickly to get life insurance and a will, Martindale said.

The Taylors also need to make a big decision about their home in Tujunga, which they bought at the peak of the market in 1986.

Because they want their children to have their own rooms, the couple are considering moving. Martindale advises against that because the couple’s cash position is so tenuous.

Since the Taylors have nearly $40,000 of equity in their home, they should take out a home equity loan that could be used to expand the house they live in. That loan would be fully tax-deductible, Martindale said. Because Taylor is concerned about job security, it might be foolish for the couple to take on a larger mortgage, she said.

Though Taylor’s pension account through the motion picture industry holds about $10,000, the couple need to start additional retirement savings. Lorie could open a separate retirement account such as a Simplified Employee Pension Plan.

In the end, the Taylors know they have a long way to go and some sacrifices ahead. And while they may not yet be ready to make some of the tough choices they need to make, they are on the right track, Martindale said.

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Meet the Planner

Judith Martindale is a certified financial planner in San Luis Obispo and co-author of “52 Simple Ways to Manage Your Money” and “A Woman’s Guide to Retirement Planning.” She received a master’s in education from the University of Cincinnati. She is also a registered investment advisor.

THIS WEEK’S MAKE-OVER:

Investors: Warren and Lorie Taylor

Ages: 41 and 34

Occupations: Post-production supervisor and self-employed hairdresser

Annual income: About $60,000

Goals:

Start saving, stop living paycheck to paycheck

Send kids to college

Build a retirement fund

Get a will and life insurance

Current assets:

Cash: $13,500

Home equity: $40,000

Retirement plan: $10,400

Cars: Two cars worth $14,000, fully paid

Debts/obligations:

$500 credit card debt

$110,000 still owed on home ($900/month mortgage)

$700/month in private-school tuition

Recommendations:

Boost cash reserves to about $17,000 because of job uncertainty. After that, save $500 a month.

Start investing retirement funds in:

Vanguard Index Trust 500 Portfolio. (800) 662-7447

Schwab 1,000 (800) 526-8600

Make tough decisions to boost income and cut spending:

Wife may need higher-paying job

Kids may need to reduce expensive extracurricular activities

Private school may be too costly.

Carefully monitor spending.