Khalil Parker and Deidre Downey have very little money in the bank, no savings for a down payment on the house they hope to buy and a 2-month-old baby. “We’ll sleep again someday,” Parker jokes. “Actually he’s a very chill little baby.”
Parker, 33, and Downey, 32, have tiny balances in their retirement funds. Parker has student loan debt. And the couple is learning that babies are expensive.
On the plus side, this Newcastle couple is settling down and starting to make good money. Until two years ago, Parker was always on the move as an Army medic in Afghanistan and then as a clinical systems analyst working contract-to-contract at hospitals around the country. Downey and Parker met online and had a long-distance relationship until another job move brought Parker to the Seattle area.
“Contracting brought me out here and we discovered we lived 10 minutes apart from each other,” Parker says. “I guess it worked out because now we have a baby!”
The arrival of Miles Julien Parker in May spurred the couple to get their financial house in order. In March, the Puget Sound Chapter of the Financial Planning Association paired the couple with Bob Toomey, a certified financial planner with S.R. Schill and Associates on Mercer Island.
One of the first things Parker shared with his planner is that he’d seen buddies in the military make money and then blow it. When he was younger, he’d done it too. Parker explained that when you are deployed in a Combat Zone Tax Exempt area, wages accrue tax-free — and there’s a powerful temptation to crack that nest egg wide open when soldiers get back stateside.
“I was that kid who’d had no financial advice. I partied, I bought a car, I rented apartments outside of my range,” Parker says. More recently, he admits to a weakness for all things tech.
“Khalil likes gadgets,” Toomey says. “Guy gadgets like drones. He spent quite a bit of money on them. But he’s not doing that anymore.”
Sitting down with Toomey and laying out their financial goals, the two — who come from different backgrounds — learned that they relate to money differently.
“I grew up in the foster care system, and you get what you get,” Parker says. “Finances were not focused on.”
“My family is from middle class suburbia in Redmond. My dad’s a chiropractor, he’s practical and he taught me how to save,” Downey says. “I’m a saver, Khalil is a spender.”
Khalil says this is true, pointing to the fact that he just spent a lot of money on toys that Miles can’t play with yet.
After crunching the numbers, Toomey had good news for both of them — Parker and Downey make enough money so that they can spend and save, especially after Parker eliminates his school loans. That debt was previously more than $100,000, but he’s reduced it to $28,000.
Parker and Downey both have jobs at the intersection of health care and technology. Parker is a clinical systems analyst and Downey is an account associate for a company that provides wellness benefits. She’s on maternity leave, but plans to return to her job in August.
“I’ll be working from home. I do a better job at home with fewer distractions,” Downey says. Parker is usually working from home these days, too, so they’ll swap off on baby duty. “We have benefited from that aspect of COVID,” Downey says.
“Together they make good money, $160,000 a year,” says Toomey. “Khalil and Deidre have very good long-term prospects. But right now they are focused on short-term goals.”
Those goals are to buy a house and build an emergency fund. They had a third goal — their wedding, planned for October — but they pushed the celebration back when the coronavirus pandemic made it impossible to book a venue. (They have lots of company, according to a survey of couples who planned to marry this year.)
Since beginning to work with a planner this spring, the couple went from no money in savings to $6,000. Parker has no money in his retirement fund and Downey has about $3000. The couple hasn’t saved anything for a down payment on a house, either. That makes their goals feel like faraway dreams. But Toomey showed them that is not the case.
“They have a material positive cash flow surplus — $38,000 this year and growing,” Toomey said. He explained that the surplus is what’s left after paying all expenses, 4% contribution into Parker’s retirement plan and 7½% contribution into Downey’s 401(k). The planner gave the couple a road map showing them how to allocate their excess cash so that they knock out their first two goals quickly.
“In the first three years the assumption is you are saving primarily to build up your emergency savings and down payment for your home,” Toomey told the couple. “You should be able to comfortably achieve those goals in three years.”
The planner said they could have enough money to buy a house sooner because Parker can get a VA loan, which requires less than the $65,000 down payment they would need to qualify for a conventional loan on a median house in greater Seattle.
After they’re in their own house, which Parker says he’s going to outfit with every smart device known to man, the savings goal will be baby Miles’ college education, which in 18 years will cost around $200,000 at a Washington state university, Toomey estimates. Daunting, yes, but doable, according to Toomey, in about six years with aggressive investing.
Looking at the long-term prospects of the young couple, if they keep working and investing their cash-flow surplus, their financial plan has some eye-popping figures: when they retire at age 65, Parker and Downey could have more than $7 million in retirement and equity accounts.
“What I can tell you is that my jaw hit the floor!” says Parker of his reaction to seeing all those zeros after the seven.
“In reality that’s not going to happen exactly as planned,” Toomey says. “That’s the difficulty when working with such young people. There is so much future to predict.”
Parker and Downey say they never imagined a future so bright.
“That really surprised me! I was under the impression that we’d be living check-to- check like before with no money left over. Then Bob put the numbers down — and I said, ‘Oh. OK!’ ”
Planner’s advice for young investors
Certified financial planner Bob Toomey says it’s no secret how the plan he created for Khalil Parker and Deidre Downey shows them growing into millionaires over time. The formula: consistent investing of excess cash into retirement funds that are in a diversified portfolio with 80% equities and 20% fixed income.
Could it be even more aggressive? “I think they could even have a bit higher percentage allocated to equities once they have built their emergency savings and savings for home down payment,” he says.
With coronavirus whipsawing the markets, newbie investors like Parker and Downey might feel more comfortable stashing cash into “safe” bonds.
That would be a big mistake, according to Toomey.
“Bond returns will be dismal to nonexistent going forward. Bonds have had a great run since the 80s but now that return is drastically reduced.” Current interest rates are low, Toomey explains, and if rates rise, returns on currently owned bonds could be negative. He says the historic returns seen in typical Vanguard portfolios with a lot of bond exposure won’t be repeated because of the drag from low or possibly negative returns on bonds.
Toomey’s road map for Parker and Downey, who are in their early 30s, invests most of their money in stocks, and it predicts that the portfolio will grow 7% a year.
The planner doesn’t think that’s overly optimistic. “Over the last 100 years, stocks have returned about 10% a year on average.” Yes, he concedes, there will be downdrafts and coronavirus could prove to be one of them — but in the 2050s when our makeover couple retires, the COVID-19 pandemic will most likely be a distant memory.