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Monday, Sep. 7, 1998
Military couple seeks advice on house purchase, college expenses
Adviser: Goals attainable with `careful balance of current expenses, debt'
By JEFFREY TOMICH
Staff WriterDarryl and Karen Archer's financial goals are the same as many American families: They want to be able to afford a house, send their kids to college and retire comfortably.
The Archers (not their real name) live on a South Texas military base with their two boys, ages 12 and 8.
Darryl, 36, earns a little over $30,000 a year in the service. Gail, 35, is a homemaker. The couple has been married for nine years.
Their assets total nearly $50,000, about half of which is in Series EE savings bonds. They have debts of about $13,000, led by $10,500 owed on their pickup truck.
With no rent or house payment, most of their $18,400 in annual expenses goes for groceries, auto loan payments, phone and cable service, insurance and other living expenses.
The Archers plan to move in two years and build a home in their next duty station. Darryl will retire from the military in 2001 and begin receiving a monthly pension.
The couple is curious if their financial position will let them achieve their goals. Specifically, they want to know how to invest their savings bonds, if they can afford to send their children to college and how they can build a home and maintain their standard of living after retirement.
Kendrick Herring, a certified financial planner and vice president at Frost Bank-Corpus Christi, analyzed the case.
He said the Archers should be able to achieve their goals with a careful balance of their current expenses and debt levels until Darryl retires and starts a second career.
Upon completing his military service at age 40, Darryl will receive a monthly pension benefit of $1,048 adjusted periodically for cost of living changes. His next career will determine many things about the couple's standard of living before and after retirement, Herring said.
The Archers' investment in savings bonds can eventually be used to buy a house, pay for their sons' college educations or saved for retirement, he said. The bonds currently earn 5.06 percent interest with income tax due when they are redeemed.
The earnings may be tax-free if the bonds are used for certain college expenses, Herring said. However, the tax rules regarding that exemption are complicated.
According to the Internal Revenue Service, Series EE bonds issued after 1989 or new Series I bonds can be redeemed tax-free if the proceeds are used for tuition and fees at an eligible educational institution in the year of redemption. That includes most state and private colleges and universities. The bonds must be issued to someone age 24 or older, either as a sole owner or co-owner, and must be used for themselves or a dependent.
The tax exemption begins to be phased out if the owner's modified adjusted gross income in the year redeemed is more than $50,850 for single taxpayers or $76,250 for married taxpayers filing jointly. Tax-free municipal bonds may be more attractive investments for those with higher incomes, Herring said.
He said all of the accumulated interest will be taxable as ordinary income if the bonds are redeemed to buy a house or for any reason other than educational purposes.
With $23,100 in savings bonds, Herring said the Archers need to save an extra $457 per month to fully fund their children's expected college costs.
College costs, including room and board, now run about $9,000 per year at a state college or university. By the time the Archers' 12-year-old boy starts school, the cost may rise to $12,000, he said. By the time their 8-year-old is finishing college, annual costs may run $19,000.
Herring said there are many ways to reduce the cost of college. Attending a local college or university can cut costs by more than half. Scholarships and grants can help, and the Archers' boys could work part-time to supplement living expenses.
The Archers now invest $100 per month in savings bonds. Herring said they should instead consider putting that amount in a stock mutual fund.
With 10 years left before their youngest child begins college, stocks are an appropriate choice, he said. Keeping the existing $23,100 in savings bonds will give them safe investments to supplement the more aggressive mutual fund investments.
Herring said ``retirement planning may have to wait until leaving the military and starting a new career. At that time, half of their monthly military pension, or $524 per month, could go into a savings account.''
With an average annual return of 5 percent, the Archers could accumulate $450,000 by age 65. In today's dollars, that would give them about $25,000 per year for retirement to supplement Darryl's military pension and any Social Security, Herring said.
If the Archers' savings earned a 9 percent average annual return, their savings would reach $850,000 and they could draw $36,000 annually to supplement their other income sources, he said.
Is a 9 percent rate of return realistic over the next 25 years or more? An investment account invested half in stocks and half in bonds and Treasury Bills earned an average return of 9.6 percent from January 1950 through March 1995, Herring said. That doesn't include the most recent three years of high returns in the stock market, which might not occur again.
``It's important to realize that the worst one-year period in that time incurred a nerve-wracking loss of over 18 percent and the best year gained over 42 percent,'' he said.
Finally, Herring believes the Archers should consider buying additional life insurance. Currently, Darryl has $270,000 worth of coverage and Karen, $35,000. Each of their boys is covered for $15,000.
Herring said the Archers can probably purchase inexpensive term life insurance for under $20 per month for a $250,000 policy on each adult.
``One of the most difficult tragedies a family can face is not only losing a spouse, but sufficient income to provide for the family,'' he said.
The Caller-Times is seeking people to share their financial situation with the newspaper's readers. Your name will not be used in a story and the financial planner's advice is free. Call Caller-Times business writer Jeffrey Tomich at 886-4316, e-mail him at tomichj@scripps.com or write him at P.O. Box 9136, Corpus Christi, Texas 78469.Post your comments about local news eventsFront Page || Main Index || News || Business || Texas || South Texas Outdoors || Birdwatching || Sports || Entertainment || Selena || Education || South Texas Attractions || World Wide Web