MONEY MAKEOVER
Whittle down all that debt to begin with, adviser says

By Deborah Adamson
Advertiser Staff Writer

Robert Bachini is always on the run.

Robert Bachini lives in a neighborhood in Enchanted Lake, where he has a condo. At 49, he is working three jobs and pursuing a doctorate. Deborah Booker • The Honolulu Advertiser

"When I get home, I'm tired, I'm starving," said the 49-year-old single father with one grown daughter. "I have almost no days off. It's getting to me."

But he needs the combined income of about $55,000 from his three jobs to pay for living expenses and stay current on his debts.

Bachini owes more than $20,000 — which includes car and personal loans as well as nearly $4,000 in credit card debt.

His debt stings his wallet: Payments come to more than $12,000 a year. That's in addition to more than $30,000 in annual living expenses, including mortgage payments, food, utilities and entertainment.

Last year, his condominium association levied a one-time fee of $12,600 to repair and paint the exterior. Bachini had to take out a home-equity loan to pay it.

"When I was married, we had two incomes and we were able to put some money away," he said. Now "there have been times between paychecks when I don't have cash in my pocket and I use my credit card to buy groceries."

Over the years, he has tried to get out of debt himself, but with limited success. Bachini would get a better loan or credit card, but he didn't seem to get ahead on his debt load. Seeing the pattern made him seek the help of a financial adviser.

His goal: Bachini would like to be debt-free, eventually just work one job and save enough to retire at his current lifestyle at 63.

Bachini didn't get in trouble by living a Paris Hilton lifestyle. In fact, his answering machine at home cheerfully reminds callers that he doesn't have a cell phone. But it's the little things — with an occasional large expense thrown in — that hurt him.

Bachini admits that his biggest regular expense is eating out — plate lunches for lunch and dinners out. Since he's rarely home, he doesn't have time to cook.

He got a dose of reality when Mel Hertz, a certified financial planner, told him his net worth was roughly $6,000 excluding the equity in his home.

"Whoa," he exclaimed in surprise.

The Honolulu financial adviser said he didn't include home equity from net worth because Bachini will always have to live somewhere. His two-bedroom, 1 1.2-bath townhouse is worth about $325,000; his mortgage is $250,000.

In assessing the case, Hertz didn't mince words: "Your debt level seems really high for your income. The first thing you do is pay off your debts. Those interest rates are going to start creeping up. You're paying way too much to the credit card companies."

Bachini has two credit cards with interest rates of around 10 percent. He should aggressively pay off the higher-rate card first, Hertz said.

One option: Take out a home- equity loan at less than 5 percent to pay off a portion of the cards, car and personal loans. Since the interest rate is lower, the monthly payments would drop. But Bachini should keep paying the same amount to whittle down the debt faster, Hertz said.

Moreover, the college counselor shouldn't stretch out the payments to 30 years but keep to a short-term schedule, such as four years. That way, he wouldn't be tempted to spend more because his payments have shrunk, Hertz said.

Another strategy is to borrow against the tax-sheltered annuity in his state 403(b) retirement plan.

He has more than $8,000 in the account, which is invested in fixed-income securities such as bonds. His net interest rate from this loan likely will be much lower than his home-equity loan because part of the interest paid will go back to his account.

For example, if Bachini borrows at an 8 percent interest rate from the account and the retirement plan's policy redeposits 6 percent back, he's really paying only 2 percent. The net interest rate is lower because he's borrowing his own money, Hertz said.

However, the counselor would have to pay off the loan in five years in quarterly payments.

As for budgeting, Hertz prefers to leave it up to Bachini to cut back on spending as he sees fit. The planner said he can't force Bachini to stop going to the movies, for example, because each person's priorities are different.

Bachini should look for ways to enjoy his life without giving up too much — like brewing coffee instead of buying a cup of designer java.

As for life insurance, Bachini is paying $77 a month for a policy that benefits his daughter. Hertz said he might consider dropping it because the reason one buys life insurance is to protect a dependent. For example, when a husband and sole breadwinner passes away, his homemaker wife and children could be left destitute without life insurance.

Bachini's daughter is living independently in San Diego and he doesn't have any other dependents, Hertz said.

Bachini someday will need to consider buying long-termicare insurance.

"I think that's a lot more important (than life insurance). You're more likely to use it than your car insurance or homeowners insurance," Hertz said. "Medical insurance doesn't pay for long-term care."

One last thing: He should set up a will, which would dispose of his assets the way he intended, and a living will, which would give his next of kin directives on how he should be treated should he become incapacitated.

At least, Bachini's retirement seems to be all set.

As a state employee, his state pension and Social Security payments would be enough to maintain his current lifestyle in retirement. He stands to collect around $4,500 a month — or $54,000 a year — starting at 63, Hertz said.

Hertz is fairly comfortable that Social Security will still be around when Bachini retires. He also has a good pension as a public employee. Bachini has worked for the state for 16 years and plans to stay for 14 more.

So Bachini's most pressing problem is to pay off debt.

While he would still have to hold multiple jobs, it's only temporary until he gets his debt under control.

Once Bachini is debt-free, he can start saving. Any retirement funds he puts away would be extra money on top of government benefits.

That's assuming Bachini doesn't get married again and have more children; he would have to save for their college education. It also assumes that he doesn't go on a spending spree once he retires — thinking he deserves a few goodies since he's worked hard all his life.

"The biggest problem I see individuals make is that as we mature, our incomes go up and you increase your lifestyle just before you retire. Some people double their spending in retirement," Hertz said. "Bad idea."

Hertz also would like Bachini to consider not retiring at 63. If he enjoys his work, he might wish to stay employed at least part-time through his golden years to keep himself mentally fit.

"It's important to continue to use the gray cells," Hertz said. "It's better than to retire and do nothing."