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What does money mean?
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June 16, 2000: 2:47 p.m. ET
So two San Francisco lawyers have some. Where do they want to go now?
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Checks & Balances runs weekly on CNNfn.com. People with questions about financial planning are invited to write in explaining their financial picture and short- and long-term goals. See the bottom of this article for specifics. For those selected, financial planners will review the details and suggest ways to meet those goals.
As a policy, CNNfn has not and does not change the names in Checks & Balances. But it is making an exception in this column to honor the wishes of the subjects, who balked after submitting their financial information.
The "Forrests" are a married couple. "Susan Forrest" is 35, while "Mike Forrest" is 32.
Both work as lawyers in the San Francisco area. Susan Forrest specializes in helping banks with project finance, while Mike Forrest covers legal issues for Silicon Valley-type companies.
Combined, their income is $350,000 a year. They are both associate attorneys and hope to become partners in their firms.
"We are not sure how we should invest/save our money," Susan Forrest writes. "We realize that we are earning a very good combined income, and we want to maximize our high earnings years."
A new roof above their heads
The Forrests bought a two-bedroom condo in San Francisco for $800,000, but they are looking to move on. They have a mortgage that runs $5,000 a month  on the condo, and they want to reduce that while moving into a bigger place, if possible.
"It would be our dream to be able to afford a $1.2 million-to-$1.5 million house," Susan Forrest said.
In a year or so, they may start trying to have a baby. This presents a dilemma. Does Susan Forrest want to leave work for an extended period to care for a kid? Can they "afford" to give up her income? More to the point, do they want to?
An expensive lifestyle
They don't know the answers to these questions. What they do know is that they want to furnish three rooms in their home, which they estimate will cost between $5,000 and $10,000 per room.
They also want to take some weekend vacations and enjoy their high standard of living.
"We spend a lot on food because we eat out very frequently," Susan Forrest stated. They reckon they spend around $400 a month in restaurants. Of course this has the added bonus of cutting down on their grocery bill, which only runs around $150 per month.
Off in the distance they know they want to retire quickly, while they're still relatively young. That goal is a little far off, but the couple guesses they might be able to retire around the age of 50. Possibly they could hit that goal sooner, in their late '40s. But if a financial planner tells them they have to work until they are 55, they're ready to listen.
Financial planners often say that you need 80 percent of your annual income per year in retirement. But the Forrests say that they anticipate needing at least their current income per year, and possibly more. In retirement, they want to maintain their standard of living and also travel frequently.
"We expect that we'd be spending similar to now," Susan Forrest said. Their spending "will be equal or more, but definitely not 80 percent."
Scurrying to pay off debt
All four of their parents are still alive and still married. That suggests the Forrests themselves will enjoy a long retirement. But the Forrests don't anticipate they'll have to care for their folks down the road -- the parents are pretty self-sufficient, Susan Forrest said.
They also don't expect any great shakes on the inheritance front. "I never count on an inheritance," she explained.
The Forrests have $3,000 in credit-card debt, but they expect to pay that off in two payments. Otherwise, Mike Forrest owes $20,000 on student loans running at 8 percent.
They pay about $200 a month to Sallie Mae, the student-loan financing company, or SLM Holding Corp. (SLM: Research, Estimates). But they are also trying to pay those off as fast as they can, making cash payments of around $4,000 every two months or so.
Aggressive allocations for their retirement plans
They both contribute the maximum to their employer-sponsored 401(k) plans, though there is no employer match on those. They invest the money in the most aggressive style recommended by their plans' sponsors.
According to Susan Forrest, that means they have around 90 percent of their 401(k)s in stock-based mutual funds and 10 percent in bonds and similar items. For the stock mutual funds, about 10 percent is in international funds and the rest is concentrated in funds that invest in volatile sectors such as high-tech stocks.
They pay $250 a month in condo fees, $8,000 in real-estate taxes, $120 a month for housekeeping, and have sundry other costs, for gas, car insurance, public transportation and the like.
They also pay $150 a month for their health insurance. They don't have that much coverage on the disability and life-insurance front -- both of them are covered for one year's salary in both instances, Susan Forrest said.
As far as the rest of their money goes, Mike Forrest believes they should invest half in safe bonds and stocks and half in high-tech stocks. Susan Forrest wonders if this is the right move.
In fact, they are curious about the wisdom of most of their long-term plans. Kids could take a back seat to work. Retirement might have to be put off if it means giving up a pleasant living situation. "We want to see what a financial planner would suggest," Susan Forrest said.
What the planners say
"You are to be commended on your tenacity in paying off your consumer debt," wrote Jim Barnash, a certified financial planner with Lincoln Financial Advisors in Rosemont, Ill.
One of the first areas of concern for Barnash is the disability coverage that the Forrests have, if they were unable to work. Any reduction in their salaries could put a crimp in their lifestyle, the planner said.
The disability and life insurance they have through work is fine, he stated. But he wants more.
"While this type of coverage is good to have and is usually paid for by your employer, it is rarely sufficient," Barnash said. "The greatest asset you have is your ability to earn an income, and you should protect it to the maximum."
Barnash recommends looking at companies such as UnumProvident, MassMutual and Berkshire Hathaway, all of which provide policies with high limits of coverage with a cost-of-living adjustment rider. The Forrests should also look for a policy that lets them add to the coverage without having to provide evidence of insurability when they want to add to it, Barnash added.
Let's talk couple to couple
Peg Eddy talked with her husband, Bob, who is also a financial planner, about what the Forrests should do.
The couple has aggressive targets, the Eddys pointed out. For instance, they're shooting to retire 18 years from now, if Mike Forrest is going to retire at 50, Peg Eddy noted. She and Bob Eddy are both certified financial planner who run Creative Capital Management in San Diego.
Before they think about retirement, though, they need to sort out their short-term goals, according to Peg Eddy. "It is easy to fritter away their take-home funds unless they start with a household budget," she wrote.
Using Quicken or similar financial-management software, they need to work out exactly what their typical monthly expenses are. "This is the foundation of most solid financial plans," the planner said.
By being detailed and meticulous, they can start to track even the ATM withdrawals and spur spending that most people chalk up under the "Whim Category," Eddy said.
A big tax bill
They also need to break out their income taxes as a category, Eddy continues. They are paying about $109,000 in federal and state income taxes, she calculated, after deductions for mortgage interest, state-income-tax payments, 401(k) deferrals and itemized deductions.
After two quarters of such expense tracking, they will start to have a realistic picture of their discretionary income, Peg Eddy said. They would need to revamp the budget if an annual or unexpected expense comes due.
Though it might sound tedious, it's not all dull and dry. The Forrests should break out funds for fun and the vacations they plan to take. They also need to build a monthly "safety-net" account, the planner said.
Having cash for emergencies is vital, Eddy explained, even though Mike Forrest feels that having cash in bank accounts is earning them a D in interest and financial-planning prowess.
"Life always comes up with a curveball," she said. "What if his law-firm workload slows down due to a slowdown in the dot.com community?" she asked.
Three-to-six months of living expenses is sufficient, she said.
Debt-free means fancy free
Cash is king for the financial planners. They should save money in a money-market account so they can refurbish, according to Barnash. Then they don't have to put the expenses on credit cards. "Nothing provides more planning flexibility than being debt-free," he said.
Eddy also said they should work to retire their debt as soon as possible. This is particularly true with the credit-card debt, she says, because the interest expense is not tax-deductible.
Then they should pay off the $20,000 in student loans, she said. Even though the interest rate is lower than the credit card debt, wipe the personal balance sheet clean, she encouraged.
Spending more money than they know
The Forrests are probably spending more than they realize and declare, Eddy continued. For instance, although they think they are spending $400 a month in restaurants, "that seems quite low, unless they are frequenting fast-food establishments."
Living in San Francisco is costly. In all, Eddy figured that the Forrests are in fact spending close to $150,000 a year. They have a surplus of around $80,000 from their $350,000 income, according to Eddy, after taxes, 401(k)s and so on. With their refurbishment plans and vacations, Eddy thinks they eat up, sometimes literally, plenty of the surplus.
Their goals of moving to a new house in San Francisco, perhaps having a baby, and possibly needing to live on one income, mean they need to keep their mortgage payment as is, Eddy said. That means setting aside $400,000, above and beyond any equity they have built up in their condo.
Not all dreams will come true
Basically, if they do have a child and want to maintain their lifestyle, Eddy thinks Susan Forrest will have to work at least part-time. With roughly $131,00 net after taxes from Mike's salary and $50,000 net from Susan's, and the same size mortgage, they would have $30,000 to invest a year, Eddy said.
Splitting any investments in half, with one half in high-risk stocks and the other half in safe stocks and bonds, "is not a bad plan," according to Barnash. "Diversification is always good, and this strategy begins to address that issue."
Build a core portfolio that is invested in blue-chip stocks, he said. But buying individual shares with small amounts of cash will be costly. So the Forrests should look for tax-efficient mutual funds, Barnash says, so they can pay in gradually.
Delay the retirement?
Having half their money invested in high-tech stocks is likely a little too aggressive, Barnash said. Probably 25 percent to 35 percent would be sufficient, and international and small- and mid-cap exposure is a good idea, he says.
Yes, they are on the edge of Silicon Valley. The Forrests should not let that distract them. "You will be surprised that this type of diversification usually doesn't take away all that much from the total return," he says.
They should also delay their retirement to 60 and reduce the amount they plan on spending on golden pond, Eddy says. At their current spending rates and projections, they need to invest around $14,500 per month for Mike Forrest to retire at 50, she figures. That's if they're to have $175,000 a year in retirement, and assuming a low 8 percent return. That is not possible, Eddy says.
If they reduce the income they need in retirement to $150,000 a year, they can come close to meeting their goals, according to the planner. That also assumes that Susan Forrest continues to work part-time after they have a kid and that they keep their mortgage payments constant.
"They seriously need to look at what it will take to meet these rather aggressive goals and decide what their priorities are," Eddy states. Having a child, retiring early, living on a high annual budget and having only one spouse working are all conflicting desires.
"What does money mean to them? Is lifestyle more important than family life?" Eddy asks.
* Disclaimer
Got questions about financial planning? Need some advice? CNNfn.com has organized a panel of outside experts to answer your questions. If you want to be considered for the "Checks & Balances" column, where professional planners suggest ways you can manage your money, send us an e-mail at checksandbalances@cnnfn.com. Include information about your age, occupation, income, assets and monthly expenses -- imagine you're providing a full income statement and balance sheet. Also, share with us any short-term and long-term financial goals you may have. And don't forget to leave your phone number. 
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