Can Bachelor’s Salary Support Sudden Family?

Richard Rosenthal dropped the bombshell on his financial planners in much the same way that his girlfriend had dropped one on him:

I’m no longer the carefree bachelor, flush with cash, that I told you I was a few months ago, he confessed to two financial planners who agreed to review his finances for The Times. I need to buy a house because I’m having a baby, getting married and worried about my new family’s lifestyle and financial prospects.

Rosenthal, a 43-year-old vessel planner, says he’s still in a state of shock. Even though he has known about his girlfriend’s pregnancy for several months, he couldn’t bring himself to talk about how it might change his lifestyle.

“I was so undecided about my finances to begin with, and now I was totally lost,” he said. “I didn’t know how to adjust my budget, what to do, whether we were going to get married, live together, the whole thing.”

American Express planners Jo Ellen Nevans and Jeffrey Hilliard were nearly as shocked. When Rosenthal volunteered to participate in a Money Make-Over a few months ago, he presented himself as a free-living bachelor with loads of discretionary income.

His main concerns were learning whether he was on track with his retirement savings and whether his money was prudently invested. His biggest dilemma was deciding whether to buy a home to reduce his income taxes or simply remain in his modest, $650-a-month apartment in Long Beach, where he was perfectly content.

Now, the planners had to go back to the drawing board with a new mission: Figure out a way Rosenthal could support a wife and child, buy a $350,000 home, accumulate savings for his child’s eventual college expenses and boost insurance coverage. Rosenthal would like his future wife to have the option of staying home with the baby. Yet he doesn’t want to derail his retirement plans either.

As Nevans and Hilliard mapped out these new goals, Rosenthal became overwhelmed by the thought of the mounting expenses and wondered whether his fiancee should quit work entirely.

“Maybe she could work part time at home,” he offered tentatively.

Not to worry. Much to his astonishment, the planners told Rosenthal he can have it all, even on one income.

“You mean I can still save for retirement too?” Rosenthal asked. “Will we have enough money to go out to eat? Or go on vacation?”

Yes, yes and yes, Nevans and Hilliard responded.

Rosenthal has a couple of aces in the hole, including a high salary and a fiancee with resources of her own. (Rosenthal’s fiancee didn’t want her name used, partly because she hasn’t yet shared the news with her boss.)

Two years ago, Rosenthal became a member of the International Longshore and Warehouse Union Local 63. His wages nearly tripled as a result, to more than $100,000.

“It’s like winning the jackpot or lottery,” he said. Rosenthal describes himself as frugal but did celebrate his sudden prosperity by buying a Porsche Boxster.

Assuming that Rosenthal buys a home, next year’s tax deductions could help him support a family without changing their standard of living or savings rate, Nevans said. The tax deduction for mortgage interest would total about $22,000, while exemptions for Rosenthal’s wife and baby would create $5,600 or more in write-offs.

So Rosenthal’s federal tax liability is projected to drop from the current $26,500 to $12,000, boosting his cash flow by more than $1,200 a month.

Nevans advised Rosenthal to consult with a tax expert about withholding the right amount of taxes from his wages. An expert could also determine whether Rosenthal and his fiancee would reduce their taxes by getting married this year, when their earnings would be combined, or by waiting until 2001, when they would be relying on Rosenthal’s earnings alone.

Taxes won’t dictate the timing of the marriage, Rosenthal said, but medical insurance might. He and his fiancee would like to marry before the baby is born so she can quit work. If she quits after they’re married, she could be added as a dependent on his health insurance and the childbirth expenses would be covered.

Though some couples feel strongly that marriage should precede the birth of their first child, regardless of financial factors, Rosenthal said that wasn’t an important consideration for him. They’re very much in love, he said. Since meeting in late 1998 during a singles’ ski trip at Mammoth, the couple have spent nearly every weekend together. They’re not particularly traditional.

“I know you’re supposed to get married, buy a house, have a baby,” Rosenthal said. “We’re kind of doing things in reverse order: have a baby, buy a house, get married.”

Nevans and Hilliard’s conclusion that the couple can have it all is based on many assumptions, some of which involve the finances of Rosenthal’s fiancee. She, like Rosenthal, has been saving for retirement in a 401(k) plan.

Also, they are financially compatible and aren’t big spenders. “We like trying different restaurants, but if we spend $50 for dinner, that’s a lot,” Rosenthal said. “We’re not extravagant.”

The couple are already hunting for a three-bedroom, two-bath home in Long Beach’s Belmont Shore neighborhood, where such homes cost $350,000 to $400,000. Rosenthal would like to keep the monthly mortgage payments in the $2,000 range, which is feasible with a sizable down payment. Rosenthal plans to sell most, if not all, of his stock mutual funds, valued at $49,474, and his fiancee plans to sell her home, which has about $55,000 in equity.

Nevans and Hilliard’s financial plan also calls for Rosenthal’s fiancee to contribute all of her $14,500 cash savings to the new family’s emergency fund. Rosenthal’s cash savings of $14,220 is adequate for him, but the new family would demand a cushion of $28,700, which equals about six months of anticipated living expenses.

Their plan also includes a family-sized budget with increased expenses for housing, utilities, food, clothing, insurance, auto maintenance, medical bills and child care.

That would reduce Rosenthal’s discretionary income to $623 a month from the $2,374 he now enjoys. The smaller amount still leaves room for error, but Rosenthal should monitor expenses carefully and adjust the family budget as necessary, the planners say.

“This is new territory,” Nevans said. “We’re trying to project a lifestyle that doesn’t exist today.”

Having dependents increases Rosenthal’s need for disability insurance and creates a need for life insurance, which usually isn’t necessary for single people.

Rosenthal’s life insurance provides just $27,000 in benefits, and there is no way for him to buy additional coverage at inexpensive group rates. His union’s disability insurance plan provides just one year of coverage because Rosenthal hasn’t been a member long enough to qualify for more.

Combined with Social Security disability, his existing policy would pay only a fraction of the family’s $7,000 estimated monthly living expenses if Rosenthal couldn’t work.

Securing supplemental disability insurance for longshore workers usually is difficult, given their high risk of injury. However, because Rosenthal holds a desk job planning the loading of ships, he might be eligible. Hilliard found a policy that would provide a monthly benefit of $2,000 for five years, which would bring the family much closer to the amount they’d need. The premium: $188 a month.

Hilliard recommended that Rosenthal boost his life insurance coverage to $500,000 to maintain his family’s standard of living in the event of his untimely death. The amount assumes that his spouse would resume working, earning about $50,000 a year.

Though term life insurance would be the least expensive way to get coverage, Hilliard and Nevans suggested an alternative: variable universal life insurance. Such a policy could combine Rosenthal’s needs to accumulate college education funds and protect his family financially if he were to die.

Some enticing features of variable universal life policies: They typically offer an array of investments, including accounts that resemble mutual funds; the investments grow tax-deferred; and money borrowed from the policies isn’t taxed, nor does it need to be repaid immediately.

Offsetting those advantages, however, are the cost and the long-term financial commitment involved in buying such a product. Also, any borrowing or withdrawals during the first 10 years would result in costly surrender charges.

“With this kind of product, you’re locked in,” Nevans said. “If you’re looking at using the cash value within 10 years, this is not the way to go.”

Another option is buying term life insurance and investing the difference between the cost of the universal life policy and the term insurance to pay future college expenses. Because there is a vast gulf--roughly $7,000--between the costs of the two policies, the term account might prove the better choice.

No matter what Rosenthal decides regarding life insurance and college savings, he should continue contributing to his retirement accounts.

“Going to college is optional, but retiring is not,” Hilliard said.

Rosenthal sets aside about 10% of his gross pay in retirement accounts, but his investments are too conservative, with more than 40% going to bond funds and cash funds. The planners suggested that Rosenthal reduce the fixed-income investments to no more than 20% of the portfolio and boost the stock portion.

Overall, the plan was a great relief to Rosenthal.

“It sounds pretty quirky, but now that I’m getting married, having a child and buying a house, I’m in better shape” than when he was single, Rosenthal said. “This is really encouraging.”

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Suzy Hagstrom is a regular contributor to The Times. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/makeoverform.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

Investor: Richard Rosenthal, 43

Gross annual income: About $115,000

Goals: Make the transition from bachelor to family man. Prepare to buy a home, get married and start saving for college education of child. Provide financial security to family and save for a comfortable retirement.

Current Portfolio

* Cash and savings accounts: $14,220

* Retirement accounts: $25,664 in 401(k) via the International Longshore & Warehouse Union/Pacific Maritime Assn. joint plan. $14,686 in an individual retirement account invested in T. Rowe Price stock and bond mutual funds.

* Other investments: $49,474 in T. Rowe Price stock and bond mutual funds.

* Other assets: 1994 Ford Ranger and 1999 Porsche Boxster

* Debt: $22,265 loan on Porsche Boxster

Recommendations

* Build up cash reserve to $28,700, or six months of new family’s anticipated living expenses.

* Consult with a tax expert about dramatic lifestyle change and to determine whether it would be more advantageous to marry this year or next.

* Consider buying supplemental disability insurance.

* Consider buying a variable universal life insurance policy that could be used to save toward child’s college education while providing a death benefit of $500,000.

* Adjust retirement savings and investments to be more aggressive so no more than 20% is in bonds, with the rest in stocks.

* Convert mutual fund investments (outside of retirement accounts) to cash toward down payment for home in the Belmont Shore area of Long Beach.

* Use fiancee’s cash savings to add to family’s emergency fund.

* Have fiancee sell her home and use the $55,000 in equity to help buy family home.

Meet the Planners

Jo Ellen Nevans owns the American Express Financial Advisors Inc. branch in Rancho Palos Verdes, and Jeffrey Hilliard is her associate. The two certified financial planners are fee-based but charge commissions for insurance products. Nevans is also a certified divorce planner. Nevans and Hilliard are members of the Financial Planning Assn.’s Los Angeles chapter.