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The Gallaghers' Plan

Short on Savings

Judy Gallagher hopes to retire in nine years.

But she saves just $600 a year.

And she doesn't know where her money goes.

Judy Gallagher was jolted into thinking hard about her financial future recently. Girl Scouts of the USA was reorganizing and Gallagher's employer, the Scouts' Seven Lakes Council in Geneva, N.Y., was slated to merge with four other councils in the region. While everyone was free to apply for positions in the restructured organization—and Gallagher did—she also pursued a dozen other job opportunities.

"I got almost no positive responses," she says. Fortunately, the Girl Scouts came through, and Gallagher stayed on in a job she loves. In June, she became the new council's director of marketing and communications—"more responsibilities, same salary."

Sobered by her brush with joblessness, Gallagher has begun to contemplate retirement. Divorced since 1992, when her daughters, Allyson and Kelsey, were six and two, respectively, Gallagher is content on her own and doesn't plan to remarry. That means financing retirement is all up to her.

Now 53 years old, she'd like to quit by 62. "Both my parents died early, as well as my younger sister," she explains, adding that "my lifestyle is much healthier than my parents, though, and I grew up with four grandparents, so I'm hoping for a long life." She envisions having the financial freedom to travel, support charitable causes, visit her girls (or relocate, depending on where they end up), and pay for their weddings some day. "My kids are the most important thing in the world to me," she says.

A Savings Deficit

Gallagher has some savings, but not enough for the future she's imagining. She has accumulated about $55,000 in three 403(b) plans, two from previous employers and one from her current job; another $4,500 in a Roth IRA; and a little more than $5,500 in a bank account.

Yet rather than saving more, she's been spending almost every dollar that comes in. With her $60,000 salary and $3,000 per year that her ex- husband pays her, Gallagher's income after taxes is nearly $50,000. Her monthly payment for her three-bedroom, one-bath home in Geneva is a thrifty $550. Her debts are few, just the $53,800 balance on her mortgage, $16,000 in car loans, and about $2,000 on credit cards. Altogether, she guesses that her yearly expenses for necessities—groceries, clothing, the house, two cars, insurance—are about $40,000. Of the rest of her money, she consistently saves just $600 in her 403(b) plan at work. She often deposits about $300 a month in her bank savings account but admits that she also draws out cash from that account to pay for "quick trips and things." Other income goes to "restaurants, entertainment, charities, and gifts," she says.

Pension Perils

If her job at the Girl Scouts lasts, Gallagher expects to receive an annual pension at age 62 of about $31,000. Her Social Security benefit will add a projected $16,080 per year.

That $47,080 in combined pensions may sound substantial. However, nine years from now, at 4.5 percent annual inflation (the average since 1970), Gallagher's $31,000 pension will be worth about $21,000 in today's dollars; her Social Security payment, about $11,000.

From then on, her Social Security benefits will be indexed to rise with inflation but the Girl Scout pension won't. Its buying power will continue to erode over time, requiring an ever-increasing share of Gallagher's income to come from personal savings to maintain a lifestyle that includes travel and charitable giving.

Worse, her Girl Scout retirement benefits don't include subsidized health coverage, just the right to purchase group coverage at full cost. That could amount to a four- or even five-figure annual expense if Gallagher retires before she's eligible for Medicare at 65.

The College Debt Dilemma

Both of her daughters took out loans to pay for college, and Gallagher likes to help them out with money. "I want them to have a debt-free start in life," she says.

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