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California Learning How to Succeed in Personal Finances

Agent for Change

Couple Advised to Address Risk and Then Start Saving in Earnest


Carl Garvin has helped thousands of his insurance clients prepare for unforeseen setbacks. But while helping to secure the financial futures of others, Garvin has, ironically, failed to do much emergency planning of his own.

Inadequate life insurance and a lack of disability insurance could endanger the financial security of Garvin's family, said Delia Fernandez, a Los Alamitos-based fee-only financial planner who reviewed the Garvins' finances for The Times.

"When it comes to making financial plans, you've got to consider the worst-case scenario and protect yourself," Fernandez warned. "The way it is now, if something happens to Carl, the whole family is at risk."

Before meeting with Fernandez, Carl and Lynne Garvin were focused on other financial issues--paying off their mortgage early on their Thousand Oaks home, saving for their children's education and arranging an early retirement.

"I've seen people who have retired only when they become sick and can't really enjoy their retirement," said Carl, who just turned 40. "I don't want that to happen to me."

Fernandez said the Garvins have a good start toward their goals. The couple expect to earn about $88,000 this year. They have a net worth of about $130,000, spread among savings, retirement accounts and equity in their home.

But the first order of business is insurance.

Carl has $250,000 worth of life insurance, but Fernandez says that's too little for someone who earns more than 90% of the income for a five-member family.

How much more they need depends on "many personal things, such as if Lynne would be expected to return to full-time work if something happened to Carl," the planner said. But $1 million worth of life insurance would not be an unreasonable amount for someone like Carl.

Although he has no disability insurance, Carl says he has an understanding with his brother, with whom he runs the insurance agency. "If one of us gets sick, the other could pick up the slack for a while," allowing both to draw a regular salary.

Fernandez questioned that arrangement. She said it probably would work fine if Carl is off work for a few weeks with a broken leg. But, she asked, is it fair to his brother, even if he were willing, to require him to pick up the slack for a disability that might last years? And could he support Carl's family indefinitely if Carl had a lifetime disability?

Although such a grim scenario is unlikely, it does happen. "You might be healthy and careful, but you never know about that idiot driving the other car," Fernandez said.

In addition to increasing their insurance, Fernandez urged the Garvins to prepare a will naming guardians for their children.

After handling those immediate issues, Fernandez said, the couple should turn their focus to their savings. She believes they can achieve at least two of their three goals, as long as they save aggressively and don't change their spending habits.

The couple have never devoted much time to planning their finances--they are more likely to be reading "Goodnight Moon" to their three young sons than leafing through the financial pages.

"Up to now, we've just been sitting on our money," said Lynne. The Garvins have about $70,000 saved, but half of that earns very little return in a low-interest checking account. Simply moving most of that money to a higher-interest-bearing account could boost the return by $1,000 a year or more.

"I think we're more unaware about where to put our money than we are cautious," explained Lynne, who earns about $4,000 a year as an aerobics instructor. "Now we know it's time to do some serious planning and become more aggressive. I know our goals are very high, but we're willing to do almost anything to attain them."

Actually, the Garvins have already made two key wise moves:

* They reduced their housing costs by converting first and second home mortgages, with interest rates of 8.25% and 11%, into a single 30-year fixed loan with a 7.5% interest rate. The couple owe $194,000 on their home, which they estimate is worth about $250,000.

* They have already saved $33,000 in their retirement plans, even as they've had the expenses of starting a family.

Carl has about $20,000 in a simplified employee pension (SEP) plan, a tax-deferred account designed for small-business owners. Lynne has a $13,000 individual retirement account created with 401(k) plan money she saved while working as a medical technician before their twins were born.

Fernandez calls Carl's SEP the key to the Garvins' retirement planning, because it allows him to set aside up to 15% of his income. Also, a SEP is as easy to set up as an IRA and thus involves much less paperwork than other retirement options.

To calculate their retirement needs, Fernandez estimated that the Garvins will live into their 90s, since many members of both their families have enjoyed long lives.

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