Steadying the Financial Ship
He makes a good living on the water, but the Rademachers are in over their heads on dry land
(MONEY Magazine) -- See version adapted for CNNMoney.com
If the Louisiana oil industry hadn't tanked for a brief spell in the late '90s, Dan Rademacher wouldn't have moved up to Seattle to romance a girl he'd met just a few months earlier. When the economy picked up again, Dan convinced Jessica to move back to the Gulf with him so he could return to work as a commercial diver for an oil services company. But now that they have toddlers, the Rademachers are having second thoughts about the ups and downs of Dan's industry. "We're in demand now, but I don't know how long it will last," says Dan, 36.
So the couple have turned to real estate. In addition to relentlessly remodeling their current home, they own a rental property and a vacant lot where they hope to start building a new house next year. Dan now works on a ship and supervises other divers, which takes him offshore for weeks at a time. Meanwhile Jessica, 29, cares for Isaac, 4, and Andy, 2, manages the properties, and struggles to prioritize their many financial goals. Among them: retirement, travel and the new house. Then there's college for both of the boys and Jessica, who never got her degree and would like to return to school someday. "I feel like we're so scattered," she says.
Where They Are Now
Commercial diving is lucrative, and as Dan rose to supervisor, the Rademachers' household income climbed into the low six figures. Dan puts 15% of his salary into his 401(k), and they each allocate $100 a month to Roth IRAs. To date they've accumulated about $150,000 in retirement accounts. They also put $50 a month into 529 plans for both children. The rest of their money goes out as quickly as it comes in. A big chunk of it goes to debt repayment, including $225,000 worth of mortgages on their two homes and the lot where they plan to build. They also have a $13,000 home-equity line of credit at a pricey 8.25%, an $11,500 personal line of credit and $11,000 in credit-card debt. "We don't buy extravagant things, but we do spend too much," says Jessica, who admits to indulgences like a new elliptical trainer and a home computer.
What They Should Do
The couple are doing a good job of saving for retirement, says Bob Reed, a financial planner in Covington, La., but they really have to get a grip on their household spending. "They need to be working on a budget," says Reed. "Then they can focus--how much they'll put toward debt, how much they'll save, how much they'll spend." Once the budget is under control, they can dive into the rest of Reed's action plan.
" PAY OFF THE HIGH-INTEREST DEBT Getting rid of the $22,500 Dan and Jessica owe on the personal line of credit and credit cards with rates between 9% and 12% will give them the highest immediate payoff. First they should transfer their credit-card balances to the lowest-rate card they can find. After that, they should temporarily stop contributing to Dan's 401(k) beyond the amount of his employer's match and use the extra money to pay off the debt even faster.
" SIMPLIFY THE INVESTMENT MIX The couple's retirement accounts hold 16 mutual funds, and most of them invest primarily in large-company stocks. Not surprisingly, they all tend to move in tandem. "If everything is moving in the same direction and that direction is down, you're going to take a big hit," Reed says, pointing out that all but one of the funds in their current portfolio lost money in 2002. He recommends that the couple pare back to 12 diverse choices, including a 22% stake in the Hussman Strategic Growth fund (ticker symbol: HSGFX), which uses a complex hedging strategy to ensure that it moves out of sync with the broader market. Reed would also like them to increase their investment in Dodge & Cox International (DODFX) and to keep 26% of their portfolio in bonds, holding American Century International Bond (BEGBX), Vanguard Total Bond Index (VBMFX) and Pimco All-Asset (PASDX).
" DISASTER-PROOF THEIR FINANCES Right now the couple have no emergency fund. That's a big mistake, given the insecurity of Dan's work. Reed suggests that they keep three to six months' worth of living expenses in cash. Also, Dan should increase his 20-year term life insurance policy to $1.25 million.
" RECONSIDER THE RENTAL The Rademachers live in a good rental market, especially after Hurricane Katrina. But Reed still doesn't think their two-bedroom property is a sound investment. The rental income covers only the mortgage payment and the water bill, so the house isn't generating any cash. Moreover, if it needs major repairs or sits vacant, Dan and Jessica are on the hook. They won't make a profit on the sale, but they'll be able to pay off the HELOC and erase $90,000 of their mortgage debt. Plus, the money they currently spend on upkeep of the property could be better invested in the stock market--or in Jessica's bachelor's degree, which would yield returns for a lifetime.
Dan, 36, diving supervisor Jessica, 29, stay-at-home mom
" Retire at age 60
" Pay off debt
" Build a new home
" Save for college
$150,700 in retirement accounts
$80,000 in home equity
$2,350 in 529 plans
The couple can get better diversification with fewer funds.
LARGE-CAP STOCKS 32%
FOREIGN STOCKS 14%
Want a Money Makeover?