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  Will They Be Ready?

Lynn Halverson and Douglas Lee, 47 and 42, Ellicott City

Jobs: She is a researcher and administrator for a government consulting firm; he is a lawyer with the U.S. court system.

Annual earnings: Hers, $84,500; his, $88,816.

Sources of retirement income: Hers, Social Security, 401(k) plan, previous pension; his, Keogh for self-employment, IRA, pension, employer-sponsored savings account.

Other assets: $20,000 in certificates of deposit; house worth an estimated $332,000.

By Martha M. Hamilton
Washington Post Staff Writer
Sunday, September 26, 1999; Page H5

Halverson and Lee have been married for less than two years. Both have retirement savings—a total of about $175,000. But Halverson said, “We were just kind of saving, saving, saving without really thinking about specific goals and objectives.”

They were concerned about how to maximize their current and future investments. Halverson also noted that members of her family tend to live into their mid-90s. Initially, they also wondered whether they should sell the house they were living in and buy a more expensive one, so they could use bigger mortgage interest deductions to reduce their taxable income. After filling out the questionnaire and talking to a financial planner as part of this project, they did so.

Among the anticipated expenses that could affect their ability to save for retirement are college tuition expenses for Halverson’s 19-year-old son and for Lee’s two children, who are 15 and 12.

Gregory Robert Anderson, second vice president of TIAA-CREF Trust Co. and a certified financial planner, looked at their savings. He focused first on the need for future tuition funds. He noted that they should try to save for college expenses for Lee’s children (expenses for Halverson’s son are being funded through current cash flow).

Anderson recommended setting aside approximately $125 a month in an intermediate bond fund (assuming a 3.8 percent after-tax rate of return). He also noted that Lee is repaying a 401(k) loan at a rate of $700 a month. When the loan is repaid in two years, the $700 a month could be invested to save for college tuition.

He also recommended that the couple continue to maximize contributions to retirement plans, which should allow them to retire on the timetable they want. He recommended diversifying investments by putting 10 percent of their money into money-market funds, 25 percent into fixed-income securities and 65 percent into stocks, of which up to 20 percent could be in international equities. He also suggested that Halverson seek higher rates than she is earning with her bank IRAs, which are currently invested in short-term CDs, by switching to longer-term CDs or money-market mutual funds.

As the couple participated in this project, they decided to borrow from Halverson’s 401(k) plan to help buy their new $332,000 house, which has a separate bedroom for each of their children and extra room where the couple can play chamber music together, their avocation. They moved in last month. When they sell their previous home, they expect to pay back the 401(k) loan.

Anderson said that they should repay the 401(k) loan as quickly as possible. Although many households are tempted to borrow from a 401(k) plan to cover current expenses, they have to pay taxes and penalties and are likely to reduce their retirement income by doing so. The quicker they can pay back the loan, the longer that money will have to grow over time.

© Copyright 1999 The Washington Post Company

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