The Lundgren children and great-grandmother Orpha Lundgren | Matt Lundgren

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Born in 1914, Orpha Lundgren will celebrate her 101st birthday on Oct. 1. Here, she embraces great-grandchildren Zack and Brooke Lundgren on Halloween, circa 2010.

Matt Lundgren, a 45-year-old married father of 2 in north central Pennsylvania, won Bankrate’s Grand Prize Money Makeover award of $10,000. Matt works in the trust department of a community bank, where he has served in various capacities for 14 years. His wife Jackie, to whom he’s been married for 16 years, works in student housing at a university where she has been for 13 years. They have a 15-year-old son, Zack, and an 11-year-old daughter, Brooke. Their annual household income is $98,000.

Goals

Matt lists his financial goal as having $1,000,001 saved for retirement. Why the extra dollar? As Matt explains, “My grandmother always pleads, ‘Keep a dollar in your shoe and you’ll never go broke.’ Turning 101 years old this year, she’s my inspiration. Considering she has faced 2 world wars, a Great Depression and countless financial challenges, I will abide by her words.”

The Challenge

The Lundgrens are homeowners, and have a notable equity stake, owing $158,000 on a home valued at $305,000. With the 1st mortgage balance of $123,000, they’re 4 years into a 15-year fixed mortgage at a rate of 2.375%. They also have a $30,000 home equity loan at a fixed rate of 1.99% that was used for remodeling and will be paid off in a few years, and a home equity line of credit with a $5,000 balance at a current rate of 5%.

There is 1 outstanding credit card balance of $4,000 on a card with a 0% promotional rate until March 2016. They pay the balance in full on all other credit cards each month.

There are no outstanding auto loans, with both vehicles owned free and clear. Matt prefers used cars, so even though the older vehicle is a 2003 pickup truck, there are no near-term plans to trade it in.

The household budget is tight, and they have no emergency savings, using credit cards and the home equity line of credit for large unplanned expenses. Matt uses a “rough budget” but doesn’t track monthly spending. He admits he “would love to have 6 months of expenses” tucked into savings, but without knowing how much the monthly expenses are, he doesn’t know how much would be needed.

They don’t have any college savings earmarked for either of their 2 kids, a burden greatly eased by the fact that their children could attend the university where Jackie works tuition-free, should current benefits continue. However, room and board, as well as books and lab fees, would still be their responsibility.

They do have a couple of investment holdings in a taxable account, including $5,000 in a silver exchange-traded fund and about $5,600 in employer stock that Matt has been purchasing via payroll deductions. There is no discount on the purchase price. Though he’s showing a long-term capital gain on the employer stock, he’s reluctant to unload the silver ETF at a loss.

Matt wonders if they have enough life insurance coverage or if they should invest in a universal life policy. Matt has a term life insurance policy for $100,000, a work policy for $110,000, and a voluntary life policy for $50,000, which together add up to less than half of what he’d need at this juncture. Jackie has a term policy for $50,000, a work policy for $40,000, and a voluntary life policy for $25,000, which also appears to be less than half of what she’d need at this point.

The Lundgrens’ current net worth
Home value $305,000
Taxable account $10,600
Matt’s traditional IRA $37,000
Matt’s Roth IRA $17,000
Jackie’s IRA $400
Matt’s cash balance plan $32,000
401(k) and 403(b) accounts $207,600
Current total assets $609,600
Mortgage balance $123,000
Home equity loan $30,000
HELOC $5,000
Credit card debt $4,000
Current total liabilities $162,000
Current net worth $447,600

Matt says that he and Jackie “both have good retirement plans.” Matt is contributing 11% of his pay to his 401(k), and receives a 3.5% matching employer contribution. In addition to the 401(k), Matt has a $32,000 cash balance plan currently growing at 2.7%.

Jackie contributes 5% of her salary to her 403(b), with her employer making a generous 9.29% match. Both Matt and Jackie are fully maximizing the employer matches.

Matt has several IRAs, including both traditional and Roth accounts. The traditional IRA is worth $37,000 and consists largely of employer stock and some additional shares of the silver ETF. His Roth IRAs contain $8,000 in laddered CDs at yields between 1% and 1.4%, as well as $9,000 in an equity index fund to which he is contributing $50 per month. Jackie has a small rollover traditional IRA containing $400 in cash and is not actively contributing to it. They rebalance these retirement investments each year.

Combining all the retirement accounts, they currently have $294,000 saved for retirement.

What will it take for the Lundgrens to save $1 million? Between their contributions and the employer matches, they are well on their way to reaching their retirement goal by the time Matt reaches full retirement age of 67. But at even a modest 2.5% annual rate of inflation, by the year 2037 that $1 million will have the buying power of just $580,000 today. If the goal is to accumulate a sum equal to what $1 million will buy today, they would need to save more than $26,000 each year for next 22 years at an average 2% annual real — or after-inflation — rate of return.

The Plan

The Lundgren family | Matt Lundgren

Matt and Jackie Lundgren have been focused on saving for retirement, but other areas that require their attention include college savings for Brooke and Zack.

  • Track spending and live on a budget.
  • Jump-start emergency savings.
  • Pay off credit card and home equity line of credit.
  • Increase life insurance coverage.
  • Reallocate retirement accounts.
  • Set up 529 college savings accounts for the kids.
  • Increase retirement savings contributions.

How to get started

Maximizing savings means getting a handle on spending. Matt should start by tracking household spending in order to set up a budget.

The expenses needed to run the household serve as a baseline for determining how much emergency savings the Lundgrens will need, how much life insurance coverage Matt and Jackie will each need, and how much they are able to automatically contribute toward emergency savings, retirement and college savings.

The $10,000 grand prize Money Makeover contest winnings should serve as the starting point on accumulating emergency savings. The Lundgrens can then direct payroll deductions into a dedicated savings account to further grow this much-needed cushion.

Financial steps to take

  • Sell the silver ETF in the taxable account to pay off the home equity line of credit. This will generate a short-term capital loss of approximately $1,100, which can be used to offset income on this year’s taxes.
  • Sell the employer stock in the taxable account after the 1st of the year, deferring the long-term capital gain until the next tax year. Use the proceeds to pay off the credit card.
  • Once the Lundgrens get a better handle on their total annual household expenses, they should purchase more life insurance. Bankrate’s life insurance calculator can help determine the appropriate amount of coverage. Getting a term policy rather than permanent life insurance will keep the premiums low.
  • Make some modest reallocations to retirement investments. Jackie’s 403(b) has 7 different mutual funds. Consolidate the equity holdings evenly into just 2 funds: the Equity Index Fund, which holds U.S. stocks of all sizes, and the International Equity Fund, which holds international stocks.
  • Jackie’s account is currently 100% in stocks, so she should look to add a modest position in a broad bond index fund, aiming for a 90-10 or even an 80-20 stock/bond allocation to reduce risk.
  • Jackie should consider opening a Roth IRA because all of her existing retirement investments — 403(b) and traditional IRA — are on a tax-deferred basis.
  • Matt should prune his domestic stock mutual funds and increase his international exposure to at least one-third of the stock portion of his portfolio. Over time he may wish to gravitate toward an even weighting between U.S. and international stocks.
  • Don’t add any more employer stock in Matt’s retirement account. It already comprises nearly 15% of all his retirement investments.
  • As the CDs within Matt’s Roth IRA mature, the proceeds and subsequent contributions should be rolled into the Equity Index Fund. By virtue of the cash balance plan through his employer, Matt already has a large cash allocation in his retirement accounts, so there is no need for more.

The pathway to prosperity

Depending on their intended retirement lifestyle, Matt and Jackie may find they need less than a $1 million nest egg to retire, especially considering they will each get Social Security and own a home that will long be paid off.

To further ease the burden of what they’ll need to accumulate, they could convert more of their assets into Roth IRAs. With a Roth, they can avoid having to take mandatory withdrawals starting at age 70 1/2. More importantly, retirement money on a Roth basis is available without tax consequences.

Traditional vs. Roth IRA © Bigstock

But this isn’t a free lunch, as the conversion from a traditional to a Roth IRA is a taxable event.

Between Matt and Jackie, they have a little more than $37,000 in traditional IRAs that can be slowly converted to a Roth over a period of years to minimize the annual tax hit.

Saving for college

College will be here before they know it, so the Lundgrens should make an effort to carve out some regular contributions to a 529 college savings plan. Even a modest amount of $100 per month will add up quickly by the time Zack heads off to college in 3 years, and ongoing contributions will accumulate funds for Brooke when she enters college in 7 years.

Because the 529 plan generates investment earnings that are tax-free when later withdrawn for qualified expenses, it is a better savings vehicle for college expenses than a bank account or mutual fund.

There is an added bonus in that any 529 contributions are deductible from Pennsylvania state income taxes, regardless of whether they are made to the Pennsylvania plan or that of another state. Bankrate.com offers a free search engine to help compare plans among various states and find the 1 that is the best fit.

Save $1 million?

Matt’s goal of having a $1 million nest egg (plus an extra dollar) in today’s money means he will have to ramp up retirement savings.

Between Matt’s 401(k) contributions, Jackie’s 403(b) contributions, their respective employer matches, and the regular contributions Matt makes to his Roth IRA, they are putting away a total of $15,440 annually on a tax-advantaged basis. This is about $10,500 short of what they’d need to be putting away each year, accounting for inflation and a modest rate of return, to reach the target of $1 million (in today’s dollars).

Boosting contributions to that level is impractical at this point, particularly with the immediate need of accumulating emergency savings.

How the Lundgrens can increase retirement contributions in the years ahead:

  • Both the home equity loan and mortgage will be paid off within 11 years. This will free up additional funds for retirement investments.
  • Matt and Jackie will have a decade or more after the kids finish college to ramp up savings.
  • Matt will hit retirement age before Jackie, so they may still enjoy a few years of Jackie’s income before they’re both fully retired.

There is plenty of time and opportunity for the Lundgrens to step up savings and reach their desired goal.