With loan payments totaling more than 20 percent of their household income, they have found it increasingly difficult to maintain a cash cushion and save for the future.
If there were a master checklist for success in America, Eric and Lenor VanderWaal, of Ravensdale, could mark off many of the boxes.
The couple are mid-career professionals with University of Washington vanity plates on their vehicles. Their annual household income — about midway between $100,000 and $200,000 a year before taxes — puts them near the top of “middle income” in King County’s frothy economy.
But expenses have quietly crept up on the VanderWaals, squeezing their finances. They have found it increasingly difficult to maintain a cash cushion and save for the future.
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“Even though we make pretty decent money, we’re still living paycheck to paycheck,” Eric said.
Katie Vercio, a financial planner at the Bellevue office of investment-advisory firm Evergreen Gavekal, volunteered to help the VanderWaals get on a better path. She spotted a familiar culprit.
“They’re making a good amount of money,” Vercio said. “But they also have a lot of debt.”
Her analysis showed that the VanderWaals are spending $39,000 a year on debt payments, which sop up between one-fifth and one-quarter of their pay.
The couple’s tight cash flow has some long-term consequences. Under their current financial trajectory, the VanderWaals are likely to run out of savings in retirement, leaving them to rely on Social Security. Fortunately, they have time to adjust.
The couple have steady jobs. Eric, 46, is a real-estate appraiser with Bridgeport Appraisal in Covington. Lenor, 43, is an early Head Start teacher in Seattle with the Puget Sound Educational Service District.
Their two teenage children are living at home and going to high school. Both of them are looking ahead to college.
The couple have about $9,000 in various bank accounts, but most of their cash is invested in retirement plans.
Eric is currently contributing 3 percent of his salary to his workplace 401(k) account, which has a balance of $64,700. Lenor is enrolled in the state Public Employees’ Retirement System Plan 3, where she has a balance of $6,500.
Both VanderWaals have Roth individual retirement accounts with Ameriprise Financial. Eric has $24,600 in his IRA, while Lenor has $20,400.
As is the case with most Americans over the age of 45, the majority of the VanderWaals’ wealth is tied up in residential real estate.
Their 2,500-square-foot home outside of Ravensdale is worth about $850,000. They paid $659,000 for the property in 2016, according to King County property records.
Eric and his brother also own a rental home in nearby Maple Valley that’s worth an estimated $435,000. Because the two men have equal ownership in the house, Eric’s share is $217,500.
The debt side of the ledger is more sobering — and probably all too familiar to many people who recently bought a home in costly King County.
For their primary home the VanderWaals owe $509,400 on a 30-year mortgage with an interest rate of 4.125 percent. They also owe about $27,900 on a $50,000 secondary mortgage; they used the money to pay for such improvements as fencing and kitchen upgrades.
Eric’s share of the mortgage on the rental home is about $58,900.
Also, Lenor is paying off two student loans with a combined balance of $16,800.
Add everything up, and the VanderWaals’ liabilities come to $613,000. Their real-estate equity, retirement savings and other assets more than offset the debt, however, leaving them with a net worth of $627,000, Vercio calculated.
The VanderWaals are pushing the upper edge of middle income, although determining who falls into the middle class is not so easy.
The Pew Research Center calculates middle incomes with a formula that includes median household income, household size, the cost of living and inflation.
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Using 2016 data, Pew Research estimates that a three-person household in the Seattle-Tacoma-Bellevue area would be middle class with an annual income between $49,941 and $149,822.
Middle income for a four-person household, which includes the VanderWaals, was between $57,666 and $172,999. The family’s income falls within that spread.
Both ends of that range are undoubtedly higher today. Annual inflation in the Seattle area has averaged 2.34 percent in the last four years.
The median household income in King County is also climbing. The state Office of Financial Management projected the county’s median household income for 2017 at $89,142. If that number holds, it would be an 18 percent increase since 2014.
About 25.3 percent of adults in the Seattle-Tacoma-Bellevue area were living in upper-income households in 2016, Pew Research estimates. Middle-income adults remain the majority, at 53.3 percent.
After the VanderWaals watched their cash cushion dwindle and disappear, they decided to apply for a free Money Makeover from The Seattle Times. The Financial Planning Association of Puget Sound asked its members for a volunteer planner to work with them. Vercio stepped forward.
Lenor said she and her husband were surprised when Vercio came back with projections showing that the couple could run out of retirement savings in 2052. That’s the year Eric turns 81 and Lenor 78.
“To be honest, I had no idea,” Eric said.
“They are underfunded for retirement at this point,” Vercio said. Her probability analysis on the couple’s retirement savings gave them a 25 percent chance of having money in the bank for the rest of their lives — a projection that added another layer of urgency to charting a different course.
As luck would have it, Eric and his brother were already in the process of selling their rental home, and Vercio saw the pending sale as an opportunity to reset the couple’s finances. Selling the rental could net about $140,000 for the VanderWaals.
Vercio advised them to use the money to pay off Lenor’s student loans and the second mortgage on their Ravensdale home. Doing so would free up about $700 a month that the couple could redirect into their workplace retirement plans.
Vercio also recommended putting $45,000 from the sale into an emergency fund, giving the couple a greater sense of security and a buffer against unexpected expenses.
She urged Eric and Lenor to each put $5,500 of the rental-home proceeds into their Roth IRAs. Whatever money is left over — perhaps $39,000 or so — the VanderWaals should put into a taxable investment account.
Eric and Lenor plan to do all of those things. Meanwhile, they’ve taken matters into their own hands by cutting their spending while they wait for the sale to close.
They’re eating out less often and looking into ways to save money on such things as cellphone service and insurance. Eric’s souped-up 1976 Chevrolet Nova, which he often races at nearby Pacific Raceways, is parked for the time being. “Everything is ‘needs-only’ right now,” he said.
“We’re being more mindful about what we’re spending on,” Lenor said.
The VanderWaals’ retirement outlook is considerably brighter under Vercio’s plan, with the likelihood of the couple having retirement savings to the end of their lives increasing to 60 percent. More work needs to be done, however; Vercio says the projected odds need to be at least 80 percent.
Although their Money Makeover remains a work in progress, the VanderWaals say they are feeling better about their household finances.
“A lot better,” Eric said.
Added Lenor: “Especially on the retirement.”