Frugal couple wonder if retirement is but a dream

McClatchy-Tribune Information Services

September 19, 2016

SEATTLE — Saving for retirement is a source of financial anxiety for 29 percent of Americans, a recent survey by life insurer Northwestern Mutual estimated.

Say hello to two members of that 29 percent: Gail and Sid Ouattara, who live outside Seattle.

The Ouattaras are frugal, hold steady jobs and are so averse to debt that they saved up $8,000 for a trip to Africa — and came home with $2,000 left over. It went back into the bank.

"We don’t like debt, period," Gail Ouattara said.

Yet the couple, both in their 50s, worry whether they will have enough money to retire.

They asked for help, and the Puget Sound Chapter of the Financial Planning Association put out a call for a planner who would advise the Ouattaras at no charge. Steve Burkett raised his hand. He’s an investment adviser and principal with Palisade Investments.

He urged the Ouattaras to save more money and offered a novel approach for putting their additional savings to work, among other things.

"As long as they’re able to keep on the track they are on now, with the knowledge that they may have to delay retirement by a year or two, they’ll be fine," Burkett said.

The Ouattaras are building wealth. But are they building it fast enough?

Gail Ouattara, 59, is a teacher at the Seattle Vocational Institute, while Sid Ouattara, 55, works as a medical assistant at the University of Washington Medical Center. Their combined paychecks before taxes range from $73,000 to $83,000 a year, depending on Gail’s teaching load.

She also owns a home-based business, Marquis Resume Services, that generates between $6,000 and $15,000 in annual net income.

They have about $3,300 in a regular savings account that doubles as their emergency fund.

Both have taken advantage of their employers’ retirement plans. Sid Ouattara signed up for a Public Employees Retirement System plan, for which he has contributed about $19,000. Gail Ouattara is contributing to a 403(b) retirement savings plan that has a balance of about $85,000.

They are also in line for Social Security benefits when they become eligible.

Their biggest debt is the mortgage on their home. They bought it for $183,000 in 2011, when the real-estate market was in a ditch. They still owe $169,000 on the mortgage, but the home is now worth about $250,000.

They also owe about $10,000 on a home-improvement loan, as well as about $3,000 on credit cards.

Now that their children are grown, the Ouattaras are considering their own futures. "Our focus now is retirement," Sid Ouattara said.

Their first instinct — remember, the Ouattaras hate debt — was to pay off the mortgage early, while they are both working. So they increased their monthly mortgage payment to $2,000 a month from $1,100. The additional $900 pays down the principal.

At that rate, the Ouattaras figure they can retire their mortgage in 2026, when they are in their 60s.

But Burkett examined the couple’s finances and saw a household in need of a larger emergency fund and deeper retirement reserves.

He endorsed the Ouattaras’ accelerated mortgage payments, only with a twist.

Burkett suggested reducing the extra monthly mortgage payment to $500 and channeling $500 a month to a new investment account with a mixture of stocks and bonds.

The investment account, he explained, would double as an emergency fund and earn money more rapidly than the more conservative investments in their retirement plans.

If the Ouattaras put $500 a month into the investment account without fail, it could be worth about $79,000 in 10 years.

Meanwhile, in 10 years the couple would probably owe about $71,000 on their mortgage. At that point, the Ouattaras could use their investment account to pay off the mortgage, with a reasonable expectation that they could have a little left over.

Burkett also advised the couple to increase their retirement savings by having each put $2,500 a year into new individual retirement accounts. The money would come out of household spending.

He suggested a traditional IRA for Gail Ouattara and a Roth IRA for Sid Ouattara, in part to give the couple more tax options when they tap the accounts in retirement. Contributions to traditional IRAs may be tax-deductible, and withdrawals can be taxable. Meanwhile, contributions to Roth IRAs cannot be deducted, but the withdrawals are not taxed. The accounts also serve as emergency funds.

Burkett saw an opportunity for Gail Ouattara to increase her retirement nest egg by investing more aggressively in her 403(b) account.

About 35 percent of the account is in stock, but the remainder consists of low-yield bonds and stable value funds. Burkett suggested boosting the account’s returns by putting more money into stocks.

He would rather see 55 percent of the Ouattaras’ combined investments in stocks and 45 percent in bonds; their current ratio is the reverse of that.

When retirement does come, Burkett said, the couple’s average annual spending should be about $42,000, plus $13,000 for medical expenses.

He noted that the Ouattaras have two particular attributes that work in their favor: They have positive outlooks, and they roll with the punches.

"With that kind of attitude," he said, "they’re going to be fine."