“We’re worried about not having enough income to support our expenses,” Marv says. “We’ve relied on credit cards while I’ve been unemployed, and I haven’t been able to find work in my field. I haven’t tried to get a burger-flipping job yet, but I think that’s what it’s coming to.”
The couple’s health insurance, though COBRA, will run out in two months, and they’re worried about paying for coverage for their family of four.
Marv and Lynn, whose names have changed, have saved $469,000 in 401(k) plans, $75,500 in IRAs, $5,600 in savings and $50 in checking. They also have set aside $16,700 in college savings for their two kids, 10 and 7.
The Star-Ledger asked Michael Pirrello, a certified financial planner with Mill Ridge Wealth Management in Chester, to help Marv and Lynn get through this challenging financial time.
“It is crunch time for Marv and Lynn,” Pirrello says. “They are at a financial crossroad. They need to make some smart financial decisions and begin to generate more income to avoid getting further behind financially.”
Marv and Lynn have cut expenses significantly, but Pirrello says their monthly budget is reasonable, and discretionary spending is very limited.
Unfortunately, he says, the answer to their monthly cash flow challenges is income replacement. Marv has been unsuccessful in landing a job, but now that unemployment benefits have run out, he will need to expand his search.
“Even though we have seen slight improvements in the economy, times are still tough for the under-employed and unemployed in New Jersey,” Pirrello says. “With increased expenses around the corner for Marv and his family due to growing credit card debt and health insurance replacement costs, Marv has reached an unfortunate decision point and he has got to find employment now out of pure necessity.”
The couple have used credit cards to cover expenses. In the short run, this is a simple solution, Pirrello says, but in the long run, the impact of significant credit card debt can derail the best financial plan.
Marv and Lynn have $45,000 in credit card debt with high interest rates ranging from 16.4 percent to 22 percent. With $10,700 of the debt coming off of a zero percent offer in January, the couple’s credit card debt needs to be addressed now, Pirrello says.
“Because generating income is now paramount for Marv, we need to make an assumption that he will begin some form of employment within 6 to 8 months,” he says.
If that assumption can’t be made, then more extreme debt reduction measures may be warranted, such as negotiations with credit card companies via credit counseling services and/or selling their home to reduce monthly expenses.
Fortunately, they have an established home equity line of $70,000, so Pirrello recommends they consolidate their credit card debt into their home equity line. This would reduce the interest on the debt from an average of 18.5 percent to a more reasonable 5 percent. Going forward, they’d have one monthly payment to make rather than five separate credit card payments.
For now, they should consider the remaining balance on the equity line as an emergency source of funds to avoid using credit card debt again.
“Again, Marv’s goal must be to find some form of employment to make ends meet and avoid any type of borrowing to meet expenses on a monthly basis,” Pirrello says.
Upon losing his job, Marv was able to continue insurance coverage for his family via the COBRA program, but the 18-month limit on COBRA coverage is now up. Today, they’re paying $800 a month, and that will probably increase when they buy family coverage.
Pirrello says the couple should review the state’s website and read the “NJ Individual Health Coverage Program Buyer’s Guide” to get familiar with their options.
“They should choose a cost-effective high-deductible plan that addresses their health insurance need,” he says. “Hopefully this coverage will only be for a limited time until more permanent group coverage is obtained via employment for either Marv or Lynn.”
If they need to pay the premiums through their home equity line for the short-term, then that will have to do, Pirrello says.
While short-term times are tough, Marv and Lynn aren’t too far off track when it comes to retirement savings.
“Provided Marv is able to resume full-time employment soon, they will get back on track for their longer-term goals,” he says.
As tempting as it may be to tap retirement savings accounts to solve their short-term problems, Pirrello says they should avoid it at all costs.
“If a perfect storm scenario exists and Marv and Lynn are unable to find full-time employment and are forced to declare bankruptcy, their retirement accounts will be protected,” Pirrello says. “The credit card companies and the mortgage lenders will not lend them money to retire, so it would not be a smart financial move to withdraw their retirement savings, pay the tax on the withdrawal, pay the 10 percent early withdrawal penalty and pay-off their debts with their dedicated retirement funds.”
One additional concern is the couple’s lack of life insurance coverage. Marv only has a $100,000 term policy — his other insurance was provided by his employer and ended when his job did — and Lynn doesn’t have any, but Pirrello says with two young children to care for, they both need to increase their coverage.
Pirrello says Marv should have a minimum of $1 million of coverage, and Lynn should have between $300,000 and $500,000 of coverage.
“Marv and Lynn can get through this difficult time,” Pirrello says. “Hopefully, looking back years from now, this period of time will be an unfortunate blip on the screen.”