Saving for more than retirement

(Money Magazine) -- In day-to-day life, Miguel and Michele Suarez are carefree with their money. Take Miguel's regular shopping trips to Sports Authority. The Suarezes aren't sure how much he spends there because they don't keep a budget. "If we have extra money, I want to save it," says Michele. "Miguel has the mentality that it could do something else."

Yet when it comes to funding retirement, Michele, 30, a therapist who works with children in a hospital, and Miguel, 34, a computer programmer, are very serious.

Miguel and Michele Suarez, with Mariana and Manuel. Want a Money Makeover? E-mail us at makeover@moneymail.com.

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They save a combined 12 percent of their income in their employers' retirement plans. Now, with growing financial pressures, they know it's time to apply that zeal to the rest of their finances.

The couple, who married in May 2005, want to have a child together, and when that happens, Michele would like to take time off from work. They are also determined to fund in-state college tuition for Miguel's children, Manuel, 10, and Mariana, 8. "I want to be more practical," Miguel says.

Like so many in Florida, the Suarezes, who live outside Tampa, have dabbled in real estate. Last year they put down $7,000 on a pre-construction condo, funding the deposit from a $45,000 home-equity loan, which they also used to wipe out credit-card debt and pay for their wedding.

Unfortunately, they won't be able to sell or rent the condo at a profit in today's market. Not all of the couple's real estate plays have gone bust, however. Miguel bought their home for $122,000 in 2003, and its value has nearly doubled.

Michele owns a condo that has appreciated some $30,000, and rental income covers the mortgage and fees.

Outside their retirement plans, the couple have saved $3,500 by transferring about $350 a month automatically to a savings account.

With a baby and college tuition still to come before retirement, the Suarezes need to manage their cash flow carefully, says Kathleen Day, a financial planner in Miami.

For starters, they can cut back on expenses like karate and tennis lessons. They should forfeit the $7,000 deposit and walk away from the pre-construction condo, which threatens to become a cash drain.

They should, however, hang on to Michele's condo. "The condo is a good diversifier, and my instinct is the money would disappear if they sold it today," says Day. She also has ideas for getting the rest of their finances on track.

Save less (yes less) for retirement While it's unusual advice, the Suarezes have a lot of time to grow their nest egg and still meet their goal of retiring at age 60, says Day.

Right now Miguel contributes 15 percent of his $62,400 salary to a 401(k), and Michele stashes 6 percent of her $38,600 income in her employer's 403(b).

Miguel can reduce his 401(k) contribution from 15 percent to 10 percent, freeing up about $200 a month without losing his employer's 4.5 percent match (Michele gets 3 percent).

That move, plus a tighter budget, would allow them to put $350 a month toward Florida's prepaid tuition plan, which would lock in today's in-state tuition for both children. If the kids choose a private or out-of-state college, they can transfer the value of the plan.

Invest as one Miguel invests 60 percent of his 401(k) in a target-date retirement fund, which holds a mix of stocks and bonds and automatically rebalances, becoming more conservative as retirement nears.

If he were single, says Day, it would be a smart approach. But the Suarezes need to think of their separate accounts as a single portfolio. Michele should put most of her contributions toward T. Rowe Price Blue Chip Growth (TRBCX (Charts), a large-cap fund, which is the best fund in her plan. They'll diversify through other funds in Miguel's 401(k), including Vanguard Primecap (VPMCX (Charts), Vanguard Mid-Cap Index (VIMSX (Charts) and Pimco Total Return (PTTAX (Charts).

Build an emergency fund faster Day thinks the Suarezes will be less tempted to dip into their savings for non-emergencies if they move their $3,500 into a high-yielding money-market fund, where it should earn a 5 percent interest rate. Once they've put away three months' worth of living expenses, they can pay off their home-equity loan.

Protect the family The couple should immediately put together a will and other estate-planning documents. They also need more life insurance: For Michele, Day recommends a 30-year term policy worth $250,000, and for Miguel, $500,000 in order to cover child support and both mortgages.

"And if they have another baby, that amount needs to go up," she says. Miguel groans at buying more life insurance, but, he says, "if this is what it takes, we'll do it."

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