Michelle and Jack Ireton, of Seattle, are experiencing a personal-finance event that is almost always welcome, regardless of its size: the windfall.
This fall, the working parents of two boys saw their monthly expenses for schooling and day care drop about $200 a month when their youngest child graduated from preschool to kindergarten. Their monthly expenses will drop an additional $200 when Benjamin, now 5, graduates from kindergarten in June.
Having an additional $400 a month in unallocated money would brighten the day of anyone who manages household finances. But for the Iretons, the windfall came with a question attached: What’s the best use of the money?
They could save it for their children’s college education. Or they could sock it away for their retirement. Or they could pay down some of their debts. Or …?
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At that point, the Iretons applied for a free financial makeover from the Puget Sound Chapter of the Financial Planning Association. The chapter matched the Iretons with Tammera Prouty, vice president of Sound Financial Planning in Mount Vernon.
Prouty examined the couple’s overall finances and goals and gave them high marks.
“These guys are the chicken soup for the financial-planner soul,” Prouty said. “It’s so nice to see people doing it right.”
Both of the Iretons have steady jobs with benefits. Michelle Ireton, 45, is a human-resource specialist at the Evans School of Public Affairs at the University of Washington. Jack Ireton, 41, is a technical writer at the Bellevue office of automation-software company Automic Software. Combined, the two earn about $152,600 a year.
They also collect $1,150 a month on a condominium they rent out near the UW, although the rental property is essentially a break-even operation.
The Iretons are carrying about $495,500 in debt because of mortgages on their home and condo, as well as about $5,500 they owe on one of their cars.
Prouty was unconcerned. She said the couple were carrying only “good debt” with fixed interest rates at less than 4 percent. The Iretons use credit cards, but they pay off the balances monthly. Their debt-to-income ratio was just under 28 percent — essentially, a picture of health, Prouty said.
The couple also have about $20,000 in various household funds, including about $10,000 in a designated emergency fund.
And the Iretons are saving for retirement. Jack Ireton saves 10 percent of his pretax pay with his employer’s 401(k) plan. Michelle Ireton contributes to her UW pension while also setting aside money in a 403(b) plan.
Nonetheless, Prouty was unequivocal over what the Iretons should do with their $400-a-month windfall: sock away the money for when they become senior citizens. “You can’t get loans for retirement,” Prouty said.
She estimates the couple will need to save $1.9 million to retire at 80 percent of their current annual income.
Prouty’s recommendation was simplified by steps the couple had taken to pay for their children’s college education. The Iretons are buying prepaid tuition credits through Washington state’s Guaranteed Education Tuition, or GET, program. They are well on their way to accumulating enough tuition credits for both of their boys.
Prouty also advised the Iretons to increase their designated emergency fund to $25,000 from $10,000. If one of the Iretons were to become unemployed, a $25,000 emergency reserve could support the family for about six months — enough time to find another source of income, she said.
The Iretons are moving ahead on Prouty’s advice. They plan to pay off their $5,500 car loan by the end of next year. Ending their car payments will help the couple ratchet up the amount of money Jack Ireton contributes to his 401(k) to 15 percent by 2016.
They are comfortable investing more in their own retirement instead of their children’s education, largely because the family has accumulated hundreds of GET credits. Besides, their children will have additional options when the time comes, such as scholarships and loans.
Michelle Ireton peers into the family’s financial future and sees uncertainty in the form of such things as inflation and taxes. But, she added, “it’s good to know what we should be working toward.”
“Pending a zombie apocalypse,” she said, “I think we’ll be OK.”
George Erb is a Seattle-based freelancer.