By David Butts
Advertiser Staff Writer
Susan and Paul Sumile want to spend loads of time with their three small children, cover all their monthly expenses without going into debt and save for retirement.
It's a stretch.
The Sumiles earn a typical wage for Hawai'i just shy of the $65,872 median income for a family of four in 2000. They avoid impulse spending and pay off their credit-card balance in full each month. But after they've covered their mortgage, food bill, schooling costs, car expenses and utilities, there is nothing left over for saving.
Paul works full time as an exterminator at Orkin; Susan is a bookkeeper for a property management company.
Susan cut her hours to 20 a week after giving birth to their third child in July. With that, Paul and Susan could adjust their work schedules so one of them is always home. But it also reduced her salary by 30 percent and made saving much harder.
"Everything that comes in each month goes out," said Susan, who handles the finances in the family.
The Sumiles want to retire at age 65 20 years away for Paul and 26 for Susan. Susan said she hopes they can travel when they retire, and she'd like to own a small business that wouldn't require her full-time attention.
Their 7-year-old daughter, Kayla, is going to St. Michael's School, which costs $300 a month. Bryce, 4, and Cameron, the newborn, will most likely attend the same school as Kayla when they get older. The Sumiles would like to be able to send all three kids to college.
"I'm looking for how can we save," Susan said.
There is not a lot of fat to trim from their budget. Susan clips coupons for groceries and shops at Costco and Sam's Club every couple of weeks. They've given up new cars. They don't go out to dinner. When they occasionally buy takeout food, they get Korean plate lunches and make them last a couple days.
They canceled their cable connection to the Internet and went back to a dial-up provider, even though Susan says she hates it. They cut minutes out of their cell-phone plan. They put in a solar water heater to save on electricity.
The last movie the family went to was "Lilo & Stitch," and they can't remember the one before that. They rarely travel. The kids wear hand-me-downs from friends and cousins. When they buy new, it comes from Ross.
Still Susan said, "I'm sure we could save at least $150 from our budget by cutting little things that we buy."
Option of refinancing
Joseph Rothstein, a certified financial planner and practitioner with American Express Financial Advisors, suggested they refinance their home as one way to add to savings.
The Sumiles: Paul, 45; Susan, 39; Kayla, 7; Bryce, 4; and Cameron, 4 months. House: Three bedrooms, two baths in Whitmore; bought in 1989 for $125,000. Refinanced in early 1990s at a 7.125 percent interest rate. Work: Paul, full-time exterminator at Orkin; Susan, part-time bookkeeper. Combined salary of $64,000. Savings: $81,000 in 401(k) retirement funds Goals: Spend time with the children; send children to private schools and college; retire at 65 with $40,000 (in today's dollars) annual income. Challenges: With an already tight budget, how can they save for college and retirement? How can they save money without sacrificing time spent with the children? The Makeover: The Sumiles first needed to assess where they are and calculate how much they need to save each month to reach their goals. Once they had that number, they could focus on changes that may help them get there, including refinancing their home and home-schooling their children. They should save first for retirement and second for college, because they may be able to get scholarships or loans to help with college. They should consider using a Roth IRA for retirement savings as that would allow them to draw on the money without paying taxes.
College expenses might be flexible
The Sumiles: Paul, 45; Susan, 39; Kayla, 7; Bryce, 4; and Cameron, 4 months.
House: Three bedrooms, two baths in Whitmore; bought in 1989 for $125,000. Refinanced in early 1990s at a 7.125 percent interest rate.
Work: Paul, full-time exterminator at Orkin; Susan, part-time bookkeeper. Combined salary of $64,000.
Savings: $81,000 in 401(k) retirement funds
Goals: Spend time with the children; send children to private schools and college; retire at 65 with $40,000 (in today's dollars) annual income.
Challenges: With an already tight budget, how can they save for college and retirement? How can they save money without sacrificing time spent with the children?
The Makeover: The Sumiles first needed to assess where they are and calculate how much they need to save each month to reach their goals. Once they had that number, they could focus on changes that may help them get there, including refinancing their home and home-schooling their children. They should save first for retirement and second for college, because they may be able to get scholarships or loans to help with college. They should consider using a Roth IRA for retirement savings as that would allow them to draw on the money without paying taxes.
Last year, they took out an equity credit line on their home and used $2,000 for home repairs. In August they used an additional $13,900 to purchase a 1998 Ford Explorer. The equity line has a 6.6 percent interest rate, and the Sumiles hope to repay it in five years.
"I called our mortgage company," Susan said. The lender said the Sumiles could combine their two loans into one at a lower rate and save $250 a month.
"I'm not sure we want to do that," Susan said. "It would extend our current mortgage by five years, as well as dragging out our equity line. I'm not sure we want to have a mortgage for another 30 years."
Susan is also concerned that whatever they save from refinancing will be eaten up by the increasing cost of educating their children.
"We have our son going to preschool now and pay $180 a month, but he'll start kindergarten next August and that will add $120 to our monthly expenses," Susan said.
Their younger son, Cameron, will start preschool in three years.
The Sumiles also want to set aside money for the kids' college education. Rothstein advised them to make retirement their priority.
"You can borrow money to go to college. You can't borrow money to pay for your retirement," Rothstein said.
Not only that, but if the children apply for college financial aid, the Sumiles' retirement accounts will most likely be exempt from the calculation for eligibility, Rothstein said. That is not the case with money set aside specifically for college, he said. One more advantage is that in many cases, parents can take money out of retirement accounts to help pay for college if needed, Rothstein added.
Roth IRA for savings
Rothstein suggested they put most of their savings in a Roth individual retirement account.
Gregory Yamamoto The Honolulu Advertiser
The Sumiles bought their Whitmore home for $125,000 in 1989. Once they set a savings goal, new refinancing may be a viable option.
Gregory Yamamoto The Honolulu Advertiser
The bigger problem for Susan and Paul is knowing how much to save.
Rothstein's message was: The more you can save, the better.
He also suggested they think of their retirement savings as another bill and make sure it gets paid every month.
He did a rough calculation of what the Sumiles would need to save in the next 20 years if they were to have a portfolio large enough to spin off $50,000 a year in interest, exclusive of any other sources of retirement income. The number he came up with was $1 million. To get there, they would have to save $2,400 a month.
"That's not reasonable," Rothstein said, but he felt the point was to move "in the right direction."
The Sumiles should come up with a number they are comfortable with and try to save that amount each month, he said.
Susan said: "I think what I need is that figure out there that says, 'If you want to retire at this amount per year, you need to save this money.' I need that goal. If it were $300 a month, maybe we could do it."
Geal Talbert, an investment representative with Edward Jones, helped calculate exactly how much they would need to accomplish all their goals, starting with college for the kids. The cost of tuition and fees at the University of Hawai'i for all three kids will be about $80,000, assuming 5 percent annual inflation, she said. That means they would need to save $235 a month, starting now, if they earn an average annual return of 9 percent.
That 9 percent may seem fantastic given the stock market's performance in the past three years. Still, Talbert says, with enough time and diversification into high-quality investments, it is possible.
Talbert then calculated what the Sumiles would need to set aside to retire at 65 with an annual income equivalent to $40,000 in today's money. She first looked at inflation (assuming 3 percent annually) and projected they will need $70,000 a year by 2021 to buy what they can with $40,000 today.
She then considered how much they are likely to get from Social Security. The Sumiles' recent statements show Susan will get $825 a month at age 62, and Paul will get $1,028 a month. They also have $81,000 in 401(k) retirement accounts from previous jobs.
"The fact that you have $81,000 is a big plus in your favor," Talbert said. Still, Talbert figures the Sumiles need to save $5,196 this year, going up gradually to $9,111 in 2021, the year Paul turns 65, to reach their retirement goal. This assumes a 9 percent average annual rate of return on the money.
"You may say, 'How can I do that? I can hardly afford $200 a month,'" Talbert told Susan. "Here is where you and your husband have to sit down and decide your priorities."
'The whole picture'
Instead of being depressed by the numbers, Susan said she was relieved to know exactly how far she is from her goals.
"She (Talbert) really helped me see the whole picture and I was able to see the importance of starting to save a lot now," Susan said.
"Now it makes sense to refinance," she added, putting aside earlier concerns about extending their home loan.
Susan also wants to take a look at home schooling.
"Realistically, I do not think we can send three children to private schools," she said. The Sumiles ruled out public schools after sending Kayla to one for a year and finding she was bored. They also said they are worried about drugs at public schools.
"If you decide to home-school, you save so much money," Talbert said. "That's $900 a month."
Talbert offered the Sumiles encouragement, saying: "It is great that you are starting early. You have time to plan."
She added: "There are a lot of people who don't plan, and before they know it they are 60 years old with only $5,000 in an IRA."
Talbert said the lack of income should not be a barrier. "It's not how much you make, it is how much you keep," she said.
What she advises all her clients to do is know where they are now, know their goals, and put together a plan, enact it and review it once a year. "Look at the options and what works for you," Talbert said.
The one option the Sumiles have ruled out is working longer hours because that would mean less time with the children.
"It is very gratifying for us to be the sole caregivers for our children especially when they are young," Susan wrote in an e-mail. "We feel fortunate that we are able to cuddle, love, nurse, play, instruct and guide our children in their very early years. We get as much out of this as they do. We strive to be home with them as much as possible and believe providing parental guidance and supervision is our most important job."
And, who knows, maybe the children will strike it rich and money will no longer be an issue for the Sumile family. "If our child could become some kind of star, that would be best," Susan joked.