Gary MulviHill and Reddy Wilson plan to get married next year.
He's a saver; she's in debt.
They have two jobs, two homes, and four kids.
To live together, they'll need a plan.
Gary MulviHill was smitten with Reddy Royse Wilson the moment they met two years ago at a friend's wedding. "I followed her around like a puppy," he admits. "It was high school all over again."
Gary, now 54, had been divorced for 14 years. Reddy, now 45, was recently single after a 21-year marriage. When he asked for a date, she told him she was leaving on vacation and didn't know exactly when she'd be back. "I figured it was the classic brush-off," says Gary.
It wasn't. Reddy called a few weeks later, but when Gary saw her ID come up, he panicked and threw the cell phone across the room. "We were both scared," says Reddy. "It took us a while to work it out."
They're still working it out. The couple will marry in December 2010, but merging their financial lives hasn't turned out to be as easy as falling in love. "We're not sure how to proceed," Gary says candidly. "I'm desperately in love, but a lot of marriages founder over money issues and I don't want ours to be one."
The biggest issue: how to combine two households that are 60 miles apart.
Gary lives in the Chicago suburb of Oak Forest, Illinois, where he earns $84,000 as a salesman for a commercial landscaper. (His son, Evan, 19, a sophomore at Parkland College in Champaign, lives downstate with Gary's ex.)
Reddy lives in Algonquin, where she pulls down a $74,000 salary teaching speech and drama at a middle school. She shares her hectic home with three sons. Her eldest is another Evan, 20, who works for UPS; Tanner, 18, is a freshman at Western Illinois University; and Lane, 14, is a high-school freshman.
Too Much Real Estate
Gary and Reddy see each other just two or three days a week. The rest of the time, job and family demands keep them apart. Ultimately, the couple envisions living in a home halfway between their jobs, once Lane is out of high school. In the meantime, they've agreed it would be less disruptive to their family lives if Gary moved in with Reddy and her sons.
That move would also be better financially, since Reddy's two-bedroom townhouse is likely worth less than the $192,000 left on her mortgage. "Does it make sense to try to sell a property that's under water?" she wonders.
Gary is unsure whether it's wise to sell his townhouse when prices are down, however. He has a mortgage balance of roughly $86,000 on a place he estimates is worth $178,000—about $25,000 less than two years ago. "Maybe I should rent it out until the price comes back up," he says.
Different Money Styles
The couple's divergent money-management styles pose another challenge. Gary, the saver, likes to plan for the future. He started a college fund when his son was still in the womb and has contributed to it steadily.
"He's very strict with himself," says Reddy.
"Sometimes even rigid," admits Gary.
He contributes 14 percent of his salary to his 401(k) account, recently worth about $60,000, and puts aside extra money each month toward paying down his mortgage. His only other debt is a $25,000, five-year loan on a 2008 Hyundai Azera sedan.
By contrast, Reddy has never watched every penny and has been running up debt recently, partly because a dispute with her ex-husband over past child support has left her uncertain about income—and the legal bills keep rolling in.
"She's made a good home for her kids on her own," says Gary. "I admire her."
The pressing problem: Reddy owes $16,000 on her credit cards and isn't quite making ends meet on her salary plus the $6,390 a year in child support she gets for Lane. In addition to the mortgage ($1,515 a month), utilities, and feeding and clothing three young males, she's shouldering $520 in monthly payments for two Hyundais (hers and Evan's), and nearly $400 a month for a tutor for Lane.
Reddy and Gary are eager to "meet in the middle" on budget matters. But they are apprehensive about joining forces financially.
"Gary was single a long time, and I handled all the money during my marriage," says Reddy. "We're not used to negotiating our decisions."
They're Behind on Savings
Though Gary stashes one-seventh of his income for retirement, he needs to squirrel away a lot more to fulfill his dream of retiring at 66 and taking up part- time work managing the greens on a golf course. In addition to his 401(k), he has two IRAs worth about $44,000 and two taxable savings accounts totaling roughly $37,000.
As a public school teacher with 21 years on the job, Reddy can look forward to a state pension providing an enviable 75 percent of final pay at age 60, plus regular cost-of-living adjustments after that. (She hasn't paid into Social Security, though she would one day be eligible for benefits as Gary's spouse.) Her other savings are modest: just $22,000 in a 403(b) and about $4,000 in a brokerage account. Reddy hopes to quit working at 62.
College Looms for Reddy's Boys
Gary's son's college costs are under control. Next year, Evan hopes to transfer from Parkland to the University of Illinois at Urbana-Champaign, where his mother works. Her employment entitles him to a half-price rate—about $12,000 on tuition and board. Gary now pays his ex-wife $338 a month for Evan's support, and gives Evan $100 to $200 a month for spending money, outlays he plans to continue until Evan finishes college.
Education costs for Reddy's sons could be problematic. There are no funds set aside if Evan decides to return to college—he left Elgin Community College after a disappointing spring semester. Tanner has a $3,000 government loan and will use most of the $8,210 in a 529 college savings plan to cover the rest of his first- year expenses. "Then the money starts to run out," says Reddy.
There is $4,557 in a 529 plan for Lane. How much help with college funding he and his brothers can expect from their father is the subject of an upcoming court date. Gary is prepared to share financial responsibility for Reddy's boys if necessary, but Reddy hopes that won't happen. "It's not fair," she says.
Begin belt-tightening now
Combine households soon
Pay off debt quickly
Then concentrate on saving
Gary and Reddy are actually a better money match than they think. He has little debt but a relatively small retirement nest egg. She owes a lot and can't spare any cash but will get a substantial pension.
"He can help her in the short term; she can help him in the long term," says Bill Keffer, the certified financial planner behind Keffer Financial Planning in Wheaton, Illinois.
Still, their combined net worth is below $250,000, low for a pair of their ages and income. At their current rate of saving and spending, says Keffer, a secure retirement isn't likely despite Reddy's pension. They are apt to run short of money in 2037, when she is 74 and Gary is 83.
Combining homes and finances will greatly help the couple cut costs and improve their financial circumstances, says Keffer. And while adjusting to the new partnership may take time, he suggests Gary and Reddy start thinking immediately of ways to make their money work harder.
No two ways about it: maintaining two homes is a significant drag on the couple's finances. Reddy's mortgage, property taxes, and association fees are almost $1,700 a month; Gary's are about $1,050. And Reddy and Gary burn $3,000 a year in gasoline just visiting each other.
Keffer is not certain that today's soft housing market will give Gary the price he wants if he puts his house up for sale. Still, he suggests they test the waters by advertising the property—and seeing what happens.
"The urge to hold on until the market comes back is strong," says Keffer, "but people have a tendency to overvalue real estate as an investment." And Gary's $90,000 in home equity can be better deployed, Keffer adds. Gary could pay down his car and park the balance in a certificate of deposit or short-term bond fund until they find the right house.
Get Rid of Debts
Until Gary's townhouse sells, the couple should make curtailing spending to shrink their debt a top priority, says Keffer. Reddy is paying 13.9 percent interest on her one credit card carrying a balance.
That's got to be the first debt to go, says the planner, and the sooner the better. He wants Reddy to pay off $1,500 a month. "Arrange automatic payments from your checking account," says Keffer, "and don't add new charges."
Cutting back won't be easy for Reddy, who's already strapped. While Keffer leaves the nitty-gritty of budget decisions to his clients, he suggests that first you've got to know how you spend. "Get a good handle on where the money is going," he says, "so you can identify the logical expenses to eliminate."
Sharing household expenses with Gary will ease the burden on Reddy, and with Evan working he may be able to chip in. "Asking for children's help when appropriate is a great way to help them mature into financially responsible adults," Keffer notes.
As a temporary measure to clear her debt, Reddy can eliminate her $400 monthly 403(b) contribution, he adds: "She gets no employer match, and she's already in line for a great pension."
Once the plastic is paid off, Reddy should get to work eliminating her $7,000 car loan. "With real effort, she could be out of non-mortgage debt before the wedding," says Keffer.
Crank Up the Savings
Keffer calculates that in 2020, when Gary retires, the couple will need to spend $91,500 to cover necessities (the equivalent of $78,000 today) and $137,000 to fund the life they imagine for themselves. To bolster the odds that they won't outlive their money, Gary and Reddy need to bulk up their savings.
Although Gary already puts almost $12,000 a year into his 401(k), he can afford to stash $15,000, says Keffer. Once his townhouse is sold, he should be able to bump up the contributions further—to about 25 percent of his salary. By then, or soon thereafter, Reddy should be free of her non-mortgage debt and able to save as much as 25 percent of her salary in her 403(b).
Keffer's plan also calls for 7.5 percent of their salaries to go into Roth IRAs and 3 percent into regular savings for their next car and to build up an emergency fund.
To give their invested savings a boost, Keffer thinks Gary and Reddy should adjust the allocation of their tax-sheltered savings plans. Currently, they have about 55 percent in stocks, 18 percent in bonds, and 27 percent in cash. The stock allocation is fine, Keffer says, but money-market returns are puny these days. So Keffer wants the couple to have 39 percent in bonds and just 6 percent in cash.
By following these recommendations, they stand to accumulate a combined $1.2 million by the time Gary retires. When Reddy retires in 2025 and her teacher's pension kicks in, the savings they funded out of their own pockets should amount to more than $1.5 million.
That should be enough to let them maintain their lifestyle into their early 90s, says Keffer.
Fund Retirement Before College
Saving for their own retirement has to take precedence over finding cash to pay for their kids' college educations, the planner says. Students can get loans, he notes, but you have to finance retirement yourself.
If Reddy's ex-husband pays half of the college costs, the tuition bills should be modest enough that she can cover the rest from her own earnings, rather than putting the burden on Gary.
Otherwise, says Keffer, the boys should pursue loans and grants while Gary and Reddy build their retirement savings.
"Once your own security is assured, you can revisit the idea of paying for the boys' schooling—by repaying their loans," he adds.
Update Wills and Trusts
Finally, says Keffer, with their marriage approaching, Gary and Reddy may want to revise their wills and trusts.
Often, in second marriages, couples provide for the surviving spouse during his or her lifetime. After that, any remaining assets revert to the original owner's birth children.
Once Gary and Reddy decide how they will handle their estate, they need to consult an estate attorney to draw up the legal documents.
To follow the progress of this Money Makeover, read updates starting October 15 at the Payoff.